Talking Points:
- China’s economy is looking cautiously upbeat
- However once-rare bond defaults are rising
- Beijng’s policies are causing casualties in its older heavy industry
China’s economic data have improved markedly since the start of last year. Accordingly, the threat of a ‘hard landing’ there has receded from the economists’ worry lists, where once it used to top them.
But while things are certainly looking better for the world’s number two economy, some troubling issues refuse to go away. Many of them are related to corporate debt. Now Bloomberg reports that Chinese companies have posted their worst ever quarter for debt defaults. Its report came just as credit-rating agency Moody’s worried aloud about Chinese bank exposure to heavily indebted countries.
Seven companies have defaulted on a total of nine bonds this young year. That compares with 29 bonds for all of 2016, Bloomberg reported. It also said that total issuance from firms rated AA was CNY33 billion ($4.8 billion) in the first quarter. Not only is that the least since 2011 but apparently, prospective bonds worth more than four times that have been pulled this year.
The People’s Bank of China started to crack down on leverage last August, since when borrowing costs have risen. Clearly, they have risen too far for some companies. Four of the delinquencies in question came from the northeastern “rustbelt” province of Liaoning. This area has borne the brunt of capacity cutting in older, heavy-metal industries like coal and steel.
On Monday Moody’s said that Chinese banks were exposed to “considerable latent asset risks.” Almost one fifth of corporate debt it has recently studied was found to be supported by corporate cash flows insufficient to cover interest expenses.
To be clear, this isn’t a crisis for China. And there are no obvious signs that it will become one. But a rise in defaults does show how Beijing’s efforts to cool the country’s bond market are taking a toll. There will probably be more this year, especially if more measures are taken to tighten monetary conditions, ratcheting up the pressure on those exposed banks.
US President Donald Trump will meet his Chinese counterpart Xi Jinping in the US on Thursday. China will be hopeful that the White House’s vituperative rhetoric against countries which run persistent trade surpluses with the US will remain just that.
Because if it doesn’t then the more hopeful Chinese economic backdrop of the past few months will be seriously threatened. Then the finely balanced state of some of its vast corporate debt will loom larger in market minds.
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--- Written by David Cottle, DailyFX Research
Contact and follow David on Twitter: @DavidCottleFX
