China’s recent bond rally has only served to distract investors from the record wave of bonds that will mature in the second half this year.
Non-financial Chinese firms have to repay an unprecedented 2.2 trillion yuan ($341 billion) of debt, up from 2 trillion yuan in the first half. This includes 43 billion yuan of notes rated below AAA by China Lianhe Credit Rating, according to Bloomberg-compiled data reported earlier this week.
Five-year notes with A+ ratings, which are considered junk in China, yield 463 basis points over top-graded ones, nearly the widest yield spread since 2014.
Even though President Xi Jinping wants to reduce the country’s overall debt, which currently stands at 247% of gross domestic product, the credit risks are a “dagger hung in mid-air,” Haitong Securities, the nation’s second-biggest brokerage told Bloomberg.
So far this year, 11 firms have missed onshore bond payments, more than all of 2015, reported Bloomberg. Meanwhile fewer bonds are being issued as investors realize the government will no longer bail out every struggling company.
Analysts predict the first phase will see individual companies with dried up cash flows default on their bonds. This will lead to the second phase where investors lose their appetite for risk, causing a break down in refinancings, which in turn will lead to more defaults.
“A batch of junk debt arrives to maturity in the third quarter — potential defaults — and I believe that a lot of investors want to be out of the market when it happens,” Christophe Barraud, chief economist at Market Securities in Paris told Bloomberg. Barraud predicted the authorities would limit defaults to sectors with severe overcapacity to avoid rising unemployment or social tensions.
Among industries with too much capacity such as steel, the next bond maturity peak is in August, when about 80 billion yuan comes due, while about 90 billion yuan will mature in both October and November, according to UBS Group.