China Lenders’ Holdings of Corporate Debt Fall as Defaults Climb

(Bloomberg) -- China’s commercial banks are reducing their exposure to local corporate bonds after a spate of high-profile defaults rocked the nation’s credit markets in November.

Those banks’ holdings of non-financial credit bonds fell 70 billion yuan ($10.7 billion) to 3.36 trillion yuan, according to data from the China Central Depositary and Clearing Co. and Shanghai Clearing House. It’s the biggest contraction since May 2019, occurring as corporate bond payment failures reached 18.5 billion yuan in November. That prompted some investors to turn sour on the market and helped result in borrowers canceling some 92 billion yuan of planned bond sales last month, the most since April 2017, according to data compiled by Bloomberg.

There are signs Beijing is once again becoming comfortable with defaults, after moving earlier this year to prevent a wave of failures in the wake of the coronavirus pandemic. A series of delinquencies by state-linked firms last month triggered concerns about rising credit risk among the group of borrowers that dominate the world’s second-largest bond market, prompting buyers to reassess the risks of such firms or cut their holdings of these notes.

“Commercial banks are concerned about the impact of rising defaults and balance sheet risks on bonds,” according to Yewei Yang, an analyst from Guosheng Securities Co. who expects that sentiment to persist next year. He added the cautious turn on non-financial corporate bonds, especially lower-rated notes, will hurt such borrowers’ ability to refinance.

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With assistance from Bloomberg