China bond defaults double to $20 billion as property sector teeters

Iris Ouyang, South China Morning Post

Posted at Jul 19 2022 01:07 PM

Residential buildings in Beijing, China, 15 July 2022. Wu Hao, EPA-EFE
Residential buildings in Beijing, China, 15 July 2022. Wu Hao, EPA-EFE

The value of bond defaults in China in 2022 has already more than doubled the full-year total from last year, as the accelerating debt crisis in the country's US$2.7 trillion property market spills over into other areas of the economy.

Defaults by Chinese issuers have exceeded US$20 billion so far this year, compared with about US$9 billion for all of last year, with property developers accounting for most of the defaults, said Augus To, deputy head of research at ICBC International.

"The defaults may be peaking this year," he said. "Uncertainties will linger on in the remainder of the year or even next year. Improvement may come, but will take a longer time to materialise."

A total of 19 Chinese companies - 18 of them property developers - have defaulted in the offshore market so far this year, close to the whole-year total of 21 in 2021, according to Meng Ting, senior Asia credit strategist at ANZ Bank China.

For this year, she foresees a slightly higher default rate for both onshore bonds - rising to 2.2 per cent or 2.3 per cent from around 1.9 per cent - and in the offshore market, where she does yet have a specific projection.

These predictions come as economic growth in the world's second-largest economy slowed to its lowest rate in two years, new home prices fell for the 10th straight month, and unfinished homes sparked a mortgage boycott movement - all against a backdrop of large fluctuations in global financial markets amid increasing interest rates and concerns of recession.

China's bank regulator on Monday instructed lenders to provide credit to eligible property developers to help them complete unfinished homes, opening the liquidity taps for the first time since an August 2021 central bank loans cap sent the industry into a tailspin.

Property companies have US$31.7 billion in bonds due through the rest of the year, according to data from Bloomberg. Home builders in the first half contributed almost all of the US$26.2 billion in delayed offshore bond payments so far this year, Bloomberg data also show.

"Credit risk is still relatively high, firstly in the property sector, and secondly the (property risk) is sending shocks to the financial and banking systems," said Meng at ANZ.

More recently, the world's most leveraged developer, China Evergrande Group, failed to get investor approval to further delay an onshore bond payment, which could become its first onshore bond default. Ronshine China Holdings and Shimao Group Holdings also missed two deadlines each for dollar bonds earlier this month.

"While we believe the policy crackdown on China's property sector has bottomed, the down cycle has further to go, considering the rocky sales, weak sentiment and deteriorating financing conditions faced by developers," said Chang Li, director at S&P Global Ratings. "We don't expect the housing market to recover any time soon. As such, the potential for default remains high."

However, the downturn in the offshore Chinese credit market needs to be viewed within a wider scope, said Eric Liu, head of fixed income at Harvest Global Investments. The global bond markets including that in the US are also under pressure due to global interest rate increases, he said.

Experts still view the Chinese credit market as investible, with some investment-grade issuers such as state-owned enterprises being favoured.

"In an environment when the overall global financial markets experienced big retreats and when the recession risk is high, the spotlight is on onshore yuan-denominated bonds and offshore US-dollar investment-grade bonds," Liu said. Onshore rates are stable and even have room for easing, he said, adding that together with stable government support, these bonds will benefit.

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