CHINESE COMPANIES DEFAULT ON $10B DEBT AS LIQUIDITY TIGHTENS

It’s becoming clearer which parts of China’s corporate sector are most at risk of credit-market stress as Beijing pulls back liquidity: Property firms, local government financing vehicles, and energy producers.

Developers account for a fifth of the $10 billion worth of delinquencies in China this year, while some concern is growing over local state-linked firms after one based in Chongqing missed payments on commercial bills.

Coal companies in the country’s northeast are struggling to refinance in the wake of a shock default by a state-owned firm late last year, Rebecca Choong Wilkins, Molly Dai, Qingqi She, Haoyang Li, Xize Kang, Jing Zhao and Ina Zhou reported for Bloomberg News.

Beijing is walking a tightrope of allowing struggling companies to default while trying to avoid stress spilling over into the broader credit market.

The Communist Party is making the reduction of financial risk a priority this year as a strengthening economy gives officials room to tackle the nation’s debt mountain.

So far its efforts seem to be working: A key indicator of risk appetite in the broader market has remained robust despite rising delinquencies.

“As credit policy normalizes, it will be more difficult to roll over debt and we expect to see more defaults in the quarters to come,” said Carol Liao, China economist at Pimco Asia Ltd. Industries with overcapacity, signs of overheating or that are environmentally unfriendly face some of the biggest risks, she said.

They include the coal industry and smaller, highly leveraged developers with projects concentrated in lower-tier Chinese cities. Borrowers have defaulted on some $10 billion of bonds in China’s onshore and offshore credit markets so far in 2021, the highest on record compared to the same period in previous years, Bloomberg-compiled data show.

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