BOFIT Viikkokatsaus / BOFIT Weekly 2018/21

This year has seen some twenty bond payment defaults by a dozen mainland China firms. Figures released by the China Central Depository and Clearing Company (CCDC) show that the value of missed bond payments (including interest) in January-April reached 13 billion yuan (USD 2 billion), or about a third more than last year. Many of the defaulters were listed firms. Some were state-owned enterprises.

Among defaulting firms were also subsidiaries of firms that expanded aggressively in recent years. For example, Kaidi Ecological and Environmental Technology, which is listed on the Shenzhen exchange, defaulted this month on about 700 million yuan (USD 110 million) in bonds and interest. The company's largest owner (about 30 %) is Sunshine Kaidi New Energy, which is also the parent of Kaidi Finland, which is planning to build a biofuel refinery in Kemi. CEFC Shanghai International, a subsidiary of CEFC China Energy that run earlier into financial problems and withdrew from the Rosneft deal, missed this week over 2 billion yuan in scheduled bond payments.

Missing bond payments is still quite rare in China, and even fewer firms have been allowed to go bankrupt. The fact that news of such events is now making it into the public sphere suggests a changing situation and increased difficulties for firms in getting financing. It has long been hard to assess the true economic condition of Chinese firms, especially as debt payments could often be covered by simply borrowing more money. Regulatory oversight of shadow banking instruments, in particular, has been stepped up this year. This has made it harder for firms to get financing and refinance existing debt.

While China is shifting to a more market-based financial system, actual corporate risk is still not necessarily reflected in the pricing of credit, especially when investors assume the government provides an implicit guarantee. The threat of actual default has sobered investors to some extent. The government allowed the first bond default in 2014, and in recent years the number of bond defaults has risen to several dozen a year.