China debt maturity wall looms as rising rates pressure issuers
* Corporate debt worth 2.6tn yuan matures in March and April
* Rising short-term rates spark speculation of tightening
* Analysts, investors expect more credit differentiation
SHANGHAI, Jan 29 (Reuters) – Tight cash conditions in China’s financial system are turning up the heat on corporate issuers and raising the risk of more defaults in the coming months amid signs authorities in Beijing are planning to scale back COVID stimulus.
Investors hold yuan-denominated corporate bonds worth nearly 2.6 trillion yuan ($402.19 billion) that are due to mature, or that allow investors to demand early repayment, in March and April, according to S&P Global Ratings.
The wave of maturities follows a flood of issuance in early 2020, as companies took advantage of China’s aggressive policy response to the COVID-19 pandemic to raise money at low rates.
“Last year the credit risk of Chinese issuers had been delayed, but not eliminated,” said Chang Li, China country specialist at S&P Global Ratings. “The refinancing risk is very big. Even if the funding costs are very high, (issuers) have to accept that.”
With market rates already buoyed by China’s solid economic recovery, an unexpected tightening of onshore liquidity conditions has pushed them even higher and strengthened speculation that the People’s Bank of China (PBOC) may be tightening policy.
Sources told Reuters in December the central bank would scale back economic support in 2021, but that any tightening was unlikely to take place soon.
The benchmark 1-year Shanghai Key Yield stood at 2.6957% on Thursday, up more than 40 basis points since Jan. 13.
On Friday, the PBOC made a large liquidity injection into the banking system after several days of net drains, slightly easing investor concerns, though money rates remained high.
“Any policy normalisation will have to be gradual due to significant leverage in the system, and uncertainty regarding global growth outlook,” said Wai Mei Leong, fixed income portfolio manager at Eastspring Investments.
Companies that took advantage of last year’s easy environment are also facing a sceptical market after high-profile defaults in late 2020.
The spread of one-year AA rated corporate paper over nominally safer AAA paper has more than doubled since state-owned Yongcheng Coal & Electricity Holding Group Co defaulted on Nov. 10, setting off frenzied selling and a clampdown by regulators.
On Thursday, China’s securities regulator said it would “optimise a market-based mechanism” to resolve bond defaults.
Authorities are nevertheless seen reluctant to create excessive default risks.
“We believe the regulator does not want to destabilise the market but will allow market discipline to enforce credit differentiation,” said Leong.
While systemic risks are likely to be kept in check, large privately owned enterprises (POEs) may find themselves at a disadvantage to state firms as they seek refinancing, said Gary Ng, an economist at Natixis. “Even though there was an improvement in the default rate for POEs in China in 2020, that may not hold this year,” he said.
($1 = 6.4646 Chinese yuan)
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