China Likely to Face First Corporate Bond Default Amid Tight Credit Conditions

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By Jerin Mathew | December 9, 2013 7:04 PM EST

100 Yuan notes are seen in an illustration picture in Beijing. (Reuters)

China is facing its first corporate bond default as its companies suffer from tight credit conditions, according to a report.

Bloomberg, citing data from China International Capital Corp. (CICC), reported that a record 2.6tn yuan ($427bn, €311bn, £261bn) of interest and principal on securities issued by non-financial companies are due to be repaid in 2014, up 19% from 2013.

The amount is the largest since China International Capital Corp. began compiling the data in 2008 and twice the size of Ireland's economy.

CICC data shows that the 2.6tn yuan of debt due next year comprises of a record 2.13tn yuan in principal and a record 470bn yuan in interest. In addition, issuers may be required to repurchase some 200bn yuan of bonds from investors, according to CICC.

Ten-year AAA corporate bond yields surged 89 basis points since 31 December 2012 to 6.18%. That compares with a 70 basis-point rise to 2.68% for similar-rated notes on a global basis.  

"The probability of default will get much higher in 2014 as maturing debt reaches a record," according to Shi Lei, the Beijing-based head of fixed-income research at Ping An Securities.

China's publicly traded domestic debt market has never had a default since the People's Bank of China started regulating it in 1997, according to Moody's Investors Service.

Borrowing costs in China have increased due to excessive leverage by firms and many companies delayed their financing plans.

Declining Bond Sales

Bond offerings by Chinese companies declined by 23% to 1.57tn yuan in the second half of 2013 till date from the first six months of 2013.

In November, companies scrapped or delayed bond offerings worth 96.1bn yuan compared to 29.8bn yuan in October, according to filings on the websites of Chinamoney, Chinabond and Shanghai Clearing House.

High financing costs are limiting companies' cash supply and companies with heavy debt burdens are more likely to default on their debt obligations, according to experts.

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