China: Corporate Debt Defaults at "Unprecedented" Level

Deflation and debt defaults go together.

Robert Prechter's Conquer the Crash (2002) provides insight:

The ability of the financial system to sustain increasing levels of credit rests upon a vibrant economy. At some point, a rising debt level requires so much energy to sustain -- in terms of meeting interest payments, monitoring credit ratings, chasing delinquent borrowers and writing off bad loans -- that it slows overall economic performance. A high-debt situation becomes unsustainable when the rate of economic growth falls beneath the prevailing rate of interest on money owed and creditors refuse to underwrite the interest payments with more credit.

When the burden becomes too great for the economy to support and the trend reverses, reductions in lending, borrowing, investing, producing and spending cause debtors to earn less money with which to pay off their debts, so defaults rise.

The above commentary is relevant to what's going on in China today.

Read this excerpt from a March 20 CNBC article titled, "Chinese companies are defaulting on their debts at an 'unprecedented' level":

An economic slowdown and extremely tight credit conditions pushed corporate debt to a record high in China last year, according to experts.

Defaults for Chinese corporate bonds -- issued in both U.S. dollars and the Chinese yuan -- soared last year, according to numbers from two banks.

Yuan-denominated debt rose to an "unprecedented" 119.6 billion yuan ($17.8 billion) -- four times more than 2017, according to a February report by Singapore bank DBS.

Japanese bank Nomura's estimates, provided to CNBC, were even higher, putting the size of defaults in onshore bonds -- or yuan-denominated bonds -- at 159.6 billion yuan ($23.8 billion) last year. That number is roughly four times more than its 2017 estimate.

Offshore corporate dollar bonds, or U.S. dollar-denominated debt issued by Chinese companies, followed the same trend. Nomura said the amount of such debt rose to $7 billion in 2018, from none the year before.

"China witnessed an unprecedented wave of corporate bond defaults last year, in a fresh sign of wobbles hitting financial markets as slowdown deepens," said DBS analysts in the report.

According to DBS, the energy sector bailed on 46.4 billion yuan of payments in 2018 -- making up almost 40 percent of all defaults in yuan-denominated debt. Consumer companies were the next worst hit, according to the bank's report.

"The default wave is extending into 2019 ... Given the reduced risk appetite and huge maturing volume, the outlook is poor," DBS said, adding that there are 3.5 trillion yuan in corporate bonds due this year.

You can read the entire article by following the link below: