Corporate defaults in China surge in 2019 to record high $27.8b

Rapid expansion of private company debt linked to shadow banking fuels distress. Photo / Getty Images

Corporate defaults in China surged to a record high in 2019, raising new questions over how policymakers in Beijing will manage mounting financial distress among large private and state-owned companies.

Onshore corporate defaults hit Rmb 130 billion ($27.8b) in the final weeks of the year, breaking the record of Rmb122b last year, according to data compiled by Bloomberg, as economic growth fell to a three-decade low.

Private companies that expanded rapidly in recent years, accruing large piles of debt, have been at the heart of the explosion in corporate distress. Some of the country's leaders in sectors such as chemicals and textiles have faced financial pressures in recent weeks.

Defaults on US dollar-denominated bonds, which until recently were closely guarded with implicit state guarantees, have hit US$2.9b ($4.3b) this year, according to data from S&P Global Ratings.

"The recent pick-up in defaults adds to broader evidence that corporate balance sheets remain under strain," Julian Evans-Pritchard, senior China economist at Capital Economics, said in a recent note to investors.

Private sector defaults have been concentrated in industries heavily reliant on shadow bank funding — an area of the Chinese financial system where access to credit has tightened significantly over the past two years — and are now suffering from oversupply.

Yuhuang Chemical, which expanded rapidly over the past five years and opened a large methanol plant in the US in 2017, is among a growing list of large, private groups that have reneged on domestic bond payments this year.

Shandong Ruyi, the owner of UK clothing maker Aquascutum and Savile Row tailor Gieves & Hawkes, narrowly averted a default on a US$345 million US-dollar bond due on December 19. But the group is still struggling to manage a vast pile of debt that doubled in size between 2015 and 2018.

"Reduced funding access for weaker shadow banks could result in increased credit events and defaults, particularly against the backdrop of a slower environment, which can be particularly acute for private-sector enterprises," Rowena Chang, an associate director at Fitch, said in a report this month.

State-owned companies and groups controlled by local governments around China have also faced unprecedented financial pressures this year.

Commodities trader Tewoo Group, which is backed by the city government of Tianjin, forced creditors to take deep discounts on a US$300m dollar-denominated bond earlier this month, delivering a shock to investors who had thought such a high-profile state group would receive full support from Beijing.

Experts are now debating how much support state-backed companies will receive from the government in the new year following a warning from a central bank adviser over a chain reaction in missed payments.

"The 2020 wish lists for China's local government officials are likely to include new bailouts of local debt," Logan Wright and Allen Feng of independent researcher Rhodium Group wrote in a report this month. "But the debt levels are just too large at this point."

Written by: Don Weinland

© Financial Times