Corporate bond defaults to increase while LGFV bonds gains in popularity
Jun 10, 2019 (China Knowledge) - While financing conditions have improved in China this year with the Chinese government now taking on a monetary policy stance of moderate easing, global rating agency Fitch Ratings still expect a further rise in corporate bond defaults this year due to increased refinancing pressure, increased tolerance for defaults by the government and risk aversion among investors.
The current US-China trade war has hurt investor confidence, manufacturers’ profits and led to a depreciation of the Chinese yuan. Should the trade talks continue progressing in this unfavorable direction, Chinese companies will start to find it difficult to raise funds overseas.
According to Fitch, corporate bond defaults are expected to hit a record high in 2019. During the first 4 months of this year, 22 issuers have already defaulted on 47 bonds with a total principle amount of RMB 31 billion, increasing from 2018 when only 5 issuers defaulted on 11 bonds with a principle amount of RMB 9.6 billion.
Private borrowers are more susceptible to external conditions as they remain at a disadvantage in terms of access to financing channels in China. All the 22 defaulters during the first 4 months of this year were private enterprises.
In contrast to corporate bonds, bonds issued by local government financing vehicles (LGFVs) are gaining in popularity among investors. These LGFV bonds typically get high ratings as they receive strong, stable funding support from governments and interest rates on these bonds are declining as LGFVs have better credit than private enterprises.
In addition, Chinese LGFV bonds have also attracted global investors who view them as a less risky asset as such bonds have not been affected by the ongoing trade war.
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