WARNING: Chinese Corporate Bond Defaults Hit Record High

Defaults on Chinese corporate bonds rose to a record high last year, according to the credit rating firm Fitch.

Forty-five Chinese corporates defaulted on 117 bonds with a principal amount of Rmb110.5bn ($16.3bn).

Both the number of issuers and principal value were all-time peaks.


“The vast majority of onshore defaults were by non-[state-owned enterprises], which accounted for 86.7 per cent of defaults by issuer count and 90 per cent by principal amount,” said Jenny Huang and Shuncheng Zhang, analysts at Fitch, also noting signs that “investor risk appetite has deteriorated on the surge in onshore defaults”.

According to Fitch, five sectors contributed half of the total onshore corporate issuance amount in 2018: construction and engineering, industrial conglomerates, electric utilities, highways and multi-sector holdings.

Two takeaways:

Unlike government GDP data in China, which is suspect (and came in at 6.4% growth for the fourth quarter), actual defaults is a real number that does tells us something about the weakening Chinese economy.

Second, based on Austrian school business cycle theory, the defaults are occurring in the capital goods sector which is exactly where you would expect to see them occur in a bust phase of the business cycle.

-RW