Companies in China find it increasingly difficult to service their debts

This year over 50 Chinese firms have defaulted on their bonds, while last year just over 40 firms defaulted. The amount defaulted has also increased from last year, reaching 120 billion yuan (15 billion euros) as of end-November. Given the size of the Chinese market, the amounts are still relatively small. Most defaults on the bond market concern private firms, but some state-owned enterprises have also defaulted.

Companies involved in public administration are generally seen as safe investments in China as investors believe the government will step in as payer of last resort to cover their debts. It is therefore notable that this month public administration related firms have had difficulties to service their bonds. Specifically, Inner Mongolia’s Hohhot Economic & Technological Development Zone Investment Development Group, a local government financial vehicle (LGFV), defaulted on a 1-billion-yuan (140-million-euro) 5-year privately placed note. While the LGFV managed to pay off part of its debts a few days later and declared that the balance would be paid early next year, the default was only the second ever in recent history. In the other instance, a company largely owned by Peking University went into default this month when it failed to make payment on its 2-billion-yuan (250-million-euro) bond.

While a rise in payment defaults can indicate weakening economic conditions, such defaults are also a natural part of financial system development as they force lenders to consider carefully their actual risk exposure.