How Defaults in China Are Reshaping Its Credit Market: QuickTake

Chinese policy makers have long sought to liberalize the nation’s credit market by allowing more defaults, to disabuse investors of the notion that some companies are too big to fail. They’ve delivered in a major way in 2021. Debt failures have surged to a record after the government cracked down on speculation and excessive leverage in the real estate industry, leading to stumbles at a string of indebted property giants including China Evergrande Group. The result has been a repricing of risk in credit markets. Offshore borrowing costs for riskier Chinese firms surged to unprecedented levels, discouraging the kind of debt-fueled expansion that could threaten the financial system and President Xi Jinping’s grip on power.

Chinese borrowers defaulted on a record $42 billion of onshore and offshore bonds in the year to mid-December, up from a total of $30.2 billion in 2020. That month was poised to be the worst ever for Chinese offshore corporate defaults, even after regulators urged borrowers to to honor offshore debt obligations. More credit risk was simmering, with several property developers including Guangzhou R&F Properties and RiseSun Real Estate Development scrambling for ways to delay payments in 2022. Even firms that were long seen as safer, such as Shimao Group Holdings, have been trying to dispose of assets at a loss to raise much-needed cash.