Chinese companies are defaulting on their debts at an ‘unprecedented’ level

An economic slowdown and extremely tight credit conditions pushed corporate debt to a record high in China last year, according to experts. Defaults for Chinese corporate bonds — issued in both U.S. dollars and the Chinese yuan — soared last year, according to numbers from two banks. Yuan-denominated debt rose to an “unprecedented” 119.6 billion yuan ($17.8 billion) — four times more than 2017, according to a February report by Singapore bank DBS.

Japanese bank Nomura’s estimates, provided to CNBC, were even higher, putting the size of defaults in onshore bonds — or yuan-denominated bonds — at 159.6 billion yuan ($23.8 billion) last year. That number is roughly four times more than its 2017 estimate. Offshore corporate dollar bonds, or U.S. dollar-denominated debt issued by Chinese companies, followed the same trend. Nomura said the amount of such debt rose to $7 billion in 2018, from none the year before.

As the U.S. economy has been robust, the Federal Reserve has been raising interest rates to prevent overheating in the world’s largest economy. But as rates rise, bond prices fall and yields on U.S. dollar-denominated debt increase. When the yuan fell steadily against the greenback last year, Chinese companies earning in the local currency found repaying debt in U.S. dollars much harder. Analysts also blamed the record high default rate on the crackdown on shadow banking, which left private companies with less cash flow and hence unable to pay their debts.

Chinese companies are defaulting on their debts at an ‘unprecedented’ level, CNBC, Mar 21