Local government financing vehicles (LGFVs) and consumer companies could trigger new debt defaults due to larger maturity walls and greater refinancing needs, the ratings agency said in a report on Tuesday. He added that recent shipwreck incidents have just entered a complete restructuring, and more incidents will occur this year.
“Policies aimed at curbing excessive leverage have led to two waves of defaults,” Charles Chan, head of Greater China corporate ratings at S&P, said in a report. Ta. “More policies with similar objectives, scale, and effects could lead to the next wave of defaults.”
Zhang, who co-authored the report with China national expert Zhang Li, said that in 2015-2016, the first wave was led by companies in the industrial and commodity sectors, with the country experiencing overcapacity and He said 80 defaults occurred due to asset management. He added that the Chinese government's “three red lines” policy will lead to a second wave from 2021, with real estate developers accounting for the majority of the 108 defaults since then.
China Evergrande Group, which was ordered into liquidation in January amid an accounting scandal, fell into crisis for the first time in June 2021 after China folded weak development companies to curb systemic risks in its financial system. . S&P said in a report that the cash crunch at Country Garden Holdings, once China's largest homebuilder, shows the crisis is far from over.
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Booms, busts, and borrowing: Has China's housing market slumped?
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“Market access for private companies has been negative in most months since 2021,” Chan said in the report. “In the case of LGFVs, only companies with high ratings were able to issue corporate bonds, but the volume of issuance was small. Tighter regulations are limiting market access for weaker LGFVs.”
Still, S&P said there could be a trough this year as repayments fall. According to Zhang, Chinese companies have US$92 billion of offshore corporate bonds maturing, compared to US$111 billion due in 2023 and US$104 billion due in 2025. As a result, China's offshore default rate fell to 0.3% in the first quarter from 1.3% in 2023 and 6.7% in 2022.
Country Garden raises $13 million in bond coupon financing within grace period
Country Garden raises $13 million in bond coupon financing within grace period
Kenny Ng, a strategist at Everbright Securities in Hong Kong, said China's 5.3% growth last quarter should not be seen as a “significant slowdown.” The country's monetary policy remains highly accommodative and overall funding costs remain low.
Although there have been no defaults by domestic borrowers in the first three months of 2024, debt maturities this year have peaked at 8 trillion yuan ($1.1 trillion), S&P said. LGFV faces repayments of 3.5 trillion yuan, while the capital goods and power sectors have debts of 757 billion yuan and 738 billion yuan, respectively.
“Corporate bonds are a severe burden that depends heavily on corporate management,” said Shen Meng, director of Beijing-based investment firm Chanson & Company. “It will put pressure on us and shake our foundations.” Assess financial stability. ”
