China to record its first corporate bond default at USD427 billion debt due approaches

December 9
2:42 AM 2013

The state of China is on the verge of defaulting its corporate bonds amounting to a massive CNY2.6 trillion or USD427 billion next year, said a Bloomberg report. The news agency noted that China's company debt is twice as large as the economy of Ireland. The interest and principal on securities issued by Chinese non-financial companies are needed to paid by next year.

The news agency also noted that the size of the Chinese corporate debt was 19% more than the debt this year and was significantly the most since China International Capital Corp starting compiling the financial data in 2008. Since December 31 last year, ten-year AAA corporate bond yields increased 6.18 percent at 89 basis points. This has touched a new record of a 6.23% surge on November 27. In comparison, similar-rated notes globally experienced a 70-basis point rise to 2.68%.

Bloomberg rationalized the comment made by People's Bank of China Governor Zhou Xiaochuan, who indicated that the central bank will take measures to prevent leverage in excess. Many firms, said the news agency, delayed its financing plans. Moreover, the indication that the central plan will take action had also caused borrowing costs to rise. In a November 26 editorial on the official China Securities Journal, the continuing increase in rates could cause an explosion to a partial debt crisis.

Beijing-based head of fixed-income research Shi Lei at Ping An Securities Co said, "The probability of default will get much higher in 2014 as maturing debt reaches a record. The central bank's policy of controlling leverage, which may last a long time, will crowd out companies with bad credit profiles and, ultimately, help restructure the economy."

Companies' sale of bonds in China had dropped 23% to CNY1.57 trillion in the last half of the year to date as compared to the first six months of this year, as deduced from the data collected by Bloomberg. According to filings that appeared on the websites of Shanghai Clearing House, Chinamoney and Chinabond, companies had scrapped or postponed CNY96.1 billion of bonds in November.

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