China’s Corporate Bond Market: Dying Young?

[mota bhai 2,675]

By Sara Hsu
July 21, 2014

China’s corporate bond market, which has yet to mature, is already facing a potential second default. Huatong Road and Bridge Group Company, a property builder, may default on a payment due on July 23. The first onshore bond default occurred earlier this year in March, when Shanghai Chaori Solar Energy Science and Technology Company defaulted on a coupon payment. The question is, will these defaults have a positive or negative impact on China’s corporate bond market?

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The current economic slowdown has reduced liquidity in the financial sector, making it more difficult to lend and borrow smoothly. When economic growth began to slow, the People’s Bank of China reduced the corporate yield spread to increase corporate borrowing. Additional yield over sovereign notes that AAA-rated companies pay to sell their bonds has declined since March 31, but it has recently widened again due to the potential Huatong Road default. In addition, weakness in the financial economy and bankruptcies of smaller firms continue to present a challenge to firms seeking to obtain loans.

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It is widely believed that corporate bond defaults discipline the market ... But a second corporate bond default just four months after the first may put investors off this still-nascent market.

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The threat of payment defaults looms as many firms across China, particularly in the property sector, scramble to cover their debts.

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Flagging real asset prices and a liquidity crunch, particularly for smaller enterprises, leads one to question whether the potential default of Huatong Road’s corporate bond may over-amplify risk aversion among investors and frighten them away from the corporate bond market before it has truly gotten underway. In this climate of uncertainty, it sometimes seems that anything is possible.

http://thediplomat.com/2014/07/chinas-corporate-bond-market-dying-young/