New risks exposed as government retreats from implicit guarantee for debts of risky state-owned companies
China’s fast growing $15tn onshore bond market has been rattled by a wave of defaults by state-owned enterprises that threaten to expose systemic weaknesses across the financial system of the world’s second-largest economy.
More bond defaults are expected to follow as Beijing has indicated that it is no longer prepared to help state-owned debtors that run into trouble. But the ending of China’s deeply entrenched system of implicit government guarantees has left investors struggling to price credit risks.
“More defaults are coming as the Chinese authorities focus on the deleveraging of state-owned enterprises [SOEs] now that the worst of the coronavirus pandemic has passed,” says Chang Li, a China specialist at S&P Global Ratings.
Beijing’s push to impose more market discipline on debt issuers has hit valuations for some bond mutual funds and forced some fixed income managers to suspend buying orders from local retail investors. The instability also threatens to disrupt Beijing’s carefully choreographed plans to draw more participation into the bond market by international investors.