Bond Defaults in China
SOEs are not protected
In 2016, there were defaults of 79 Chinese bonds for a total value of Rmb40.3 billion. This was an increase of 243% YoY. We draw several conclusions from default data on future economic policy and how the leadership will handle rising debt:
- 1) The MostDefaults were from Private Firms and Local SOEs. The largest group of defaults in monetary terms, 83.2%, was by private firms and local state firms. Defaults by national SOEs were much smaller. Local governments don’t have the capital, or willingness, to support their state champions and private firms. Beijing is only willing to support its national champions.
- 2) Poor Ratings System. Although there were no AAA-bond defaults, the highest concentration occurred among top ranked AA+ and AA bonds, 72.4%. China’s rating system is completely ineffective.
- 3) Weak Private Credit Institutions. More than 50% of defaulted bonds were unrated Private Placement Notes. The informal capital raising system provides even fewer safeguards than the formal system, which includes the ratings agencies.
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