China Bond Defaults Rebound Further in July

(Bloomberg) -- Company bond defaults in China hit a four-month high in July as a slowing economy and risk aversion triggered by the unexpected seizure of Baoshang Bank Co. marred refinancing prospects at weaker firms.

Onshore corporate bond defaults reached at least 14.4 billion yuan ($2.1 billion) from 14 notes in July, according to data compiled by Bloomberg, bringing the total year-to-date defaults to 70.9 billion yuan from 89 bonds.

After two straight months of declines through May, bond delinquencies are climbing back. The rebound coincides with weak manufacturing data showing the nation’s economic recovery lost steam in the first half of the year. Early indicators also show growth continued to weaken in July, bolstering the case for greater policy support.

Risk appetite in China’s local bond market took a hit after Baoshang’s seizure in May, limiting funding channels for the nation’s weaker firms. The selloff pressure is also increasing in the secondary bond market, adding to more refinancing difficulties for private firms, said Yang Hao, fixed-income analyst from Nanjing Securities Co. He expects repayment pressure to remain elevated and sees more defaults going forward.

Read: At Least 60 Chinese Companies Face Debt Repayment Pressure

Here’s a further breakdown of China’s onshore default data:

• Real estate sector with 10.2 billion yuan defaults tops year-to-date default list, followed by wholesale at 9.5 billion yuan and retail sales at 7.9 billion yuan
• Investment companies topped July’s defaults, accounting for 45% of monthly total

• Jiangsu, Anhui provinces and Shanghai City were among the top 3 default locations in July

More market views:

• Small and medium-sized banks and non-bank financial institutions are cutting their holdings of lower-rated credit bonds after regulators assumed control of Baoshang Bank, according to Zhao Xue, head of fixed income at Shanxi Securities Co.

• Private-sector companies are still having hard time to obtain funding, as net financing of corporate bonds in private enterprises declined for three straight months, said Dong Dezhi, a fixed-income analyst at Guosen Securities.

NOTE: Monthly defaulted amount may be revised based on the latest company announcements and bondholder’s conference resolution announcements.

--With assistance from Tongjian Dong.

To contact Bloomberg News staff for this story: Molly Dai in Singapore at bdai13@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net

To contact the editors responsible for this story: Joshua Robinson at jrobinson37@bloomberg.net, ;Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin, Ailing Tan

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With assistance from Bloomberg