One year ago, China made a major move to open up its domestic, or onshore, bond market. But the sector is now facing a trying time as investors brace for a greater number of payment defaults in the months ahead.
That’s coming at a time when the Chinese economy faces the threat of a further slowdown amid an escalating trade conflict with the U.S., which could rattle investors already cautious about putting money in yuan-denominated assets.
As it is, there are signs that investor sentiment on China has been hit, Hou Wey Fook, chief investment officer of Singapore’s DBS Bank, said Tuesday.
He pointed to the recent sell-off in shares of Chinese companies listed in Shanghai. Last week, that market entered bear territory, meaning it had fallen at least 20 percent from recent highs.
That has happened even though bond defaults in the world’s second-largest economy are more “idiosyncratic” than widespread and the “default rate is still very low,” Hou told reporters at a briefing.
The first six months of this year saw 11 Chinese companies failing to pay the principal or interest on 20 bonds worth a total of 19.9 billion yuan (US$3 billion), according to Reuters. That compares with 26 defaults worth 26 billion yuan in the whole of 2017.
Those numbers are likely to increase as China’s efforts to clean up its financial sector have made borrowing costs higher, and more companies will find it harder to repay their debt, experts said.
In the coming quarter, more than 2,000 bonds valued at 2.3 trillion yuan (US$342.72 billion) will mature, Chinese state-owned media China Daily reported, citing data from Wind Info.
China’s opening up is still a work in progress
The increasing number of defaults coincides with the one-year anniversary of China’s “bond connect” program, which the chief executive of Hong Kong’s stock exchange, Charles Li, called a “huge breakthrough” ahead of its launch.
The initiative allows international investors to trade bonds in mainland China through Hong Kong with fewer limitations.
Older programs have a cap on the investment amount, and require foreigners to go through a lengthy process involving account opening and finding a clearing agent with international settlement.
There are now 356 overseas institutional investors registered to trade through the bond connect as of last month, while total foreign holdings of Chinese bonds — not limited to those bought through the program — grew 62.7 percent from July last year to 1.44 trillion yuan (US$214.76 billion) in May 2018, according to official statistics.