BOFIT Viikkokatsaus / BOFIT Weekly 2019/05

People’s Bank of China figures show that at the end of 2018, the stock of bonds on issue in the country totalled 86 trillion yuan (12.5 trillion dollars, equivalent to 96 % of GDP). The stock of bonds on issue increased last year by 16 % y-o-y. Bond issues were up 7 % y-o-y. New corporate bond issues increased last year by nearly 40 %, after contracting more than 30 % in 2017.

Banks account for 38 % of the bonds on issue (including policy banks), non-bank corporations 24 %, local governments 21 % and the central government 17 %. The stock of bonds issued by foreign institutions in mainland China grew by over 50 % last year, but was still just 155 billion yuan (23 billion dollars). At the end of September 2018, mainland China bonds held by foreign investors amounted to 1.75 trillion yuan. The volume rose by 58 % y-o-y, but was still just 2 % of China’s bond market overall.

China has started to allow bond defaults in recent years, though the authorities still try to use various arrangements to avoid open defaults of troubled firms. The credit rating company Fitch reports that the number of bond payment defaults in mainland China rose from 25 in 2017 to 117 last year. The total value of payment defaults of 45 firms last year was 111 billion yuan (16 billion dollars). The amount includes four state-owned enterprises. The payment defaults have shed light on China’s complex financing arrangements and brazen misrepresentation of company finances.

According to Fitch, rising risk pushed investors last year to prefer government bonds or bonds of firms with high-quality credit ratings. This was also seen in the widening interest rate gap between the bonds of firms with poor and good credit ratings. On Tuesday (Jan. 29), the interest rate on the one-year government bond was 2.4 %, the yield on the highest rated corporate bond (AAA+) was 3.2 % and the lowest high-quality corporate bond (AA-) 5.7 %.