Commentary on Political Economy

Friday, 9 April 2021


China’s Record Surge of Defaults Driven by Property Developers

Bloomberg News
  • Sector expected to continue seeing missed payments on bonds
  • Developers were 27% of China’s record first-quarter defaults

Property developers are propelling a record wave of China corporate bond defaults this year, as Beijing moves to clamp down on borrowing in the debt-laded sector.

Real estate firms made up 27% of last quarter’s record $15.1 billion of missed payments on onshore and offshore bonds, according to data compiled by Bloomberg. Chinese companies overall defaulted on 74.75 billion yuan ($11.4 billion) of local notes during the first three months of 2021, more than double the old record set a year earlier, while defaults nearly tripled to $3.7 billion for offshore bonds.

Unwaveringly High

China's bond defaults rose to a record in first quarter

Source: Bloomberg

Note: Data includes both onshore and offshore defaults in dollar term. Currency conversion is as of April 8, 2021

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The government has moved to curb debt-fueled expansion in the real estate sector as part of a broader push to refocus on financial risks, after prior efforts paused in the wake of the Covid-19 pandemic. Last month, China’s top banking regulator expressed worry about property bubbles, and recent market moves have demonstrated growing risks for investors. Developers are among the firms most likely to be impacted by Beijing’s deleveraging effort.

“Policy makers will allow more companies to default this year, particularly local state-owned enterprises in the energy sector and property developers who have borrowed aggressively and have heavier debt burdens,” said Huang Weiping, an analyst at Industrial Securities Co.

Big Trouble

Real estate sector accounted for 27% of China's first quarter bond defaults

Source: Bloomberg

Note: Data includes both onshore and offshore defaults in dollar terms. Currency conversion is as of April 8, 2021.

Developers’ proportion of China corporate bonds defaults has risen quickly the past several years. The further increase seen in the first quarter of this year was led by China Fortune Land Development Co. and Tianjin Real Estate Group Co. each missing payments on more than 10 billion yuan of bonds, according to Bloomberg-compiled data. Computer firm Tsinghua Unigroup Co. and Hainan Airlines Holding Co. also topped that level to start 2021.

Regionally, issuers from Hainan province defaulted on the most onshore debt last quarter at 23 billion yuan. Beijing, where Unigroup is based, was next and neighboring Tianjin province was third.

Onshore Defaults By Province

Hainan had highest first-quarter bond defaults in China

Source: Bloomberg

Note: Data represents onshore defaults in yuan terms.

Meanwhile, there are signs of stress for local government financing vehicles even as none have ever defaulted on a public bond. An LGFV recently defaulted on 915 million yuan of commercial bills, and analysts have been highlighting increased credit risks and divergence for the sector, which helps fund infrastructure development. So-called hidden debt at local levels was raised to a “national security” issue at March’s annual legislative gathering.

Two-third of 18 fixed-income traders and analysts surveyed last month by Bloomberg expect the government’s fresh efforts on deleveraging and reducing financial-system risks to increase LGFVs’ refinancing pressure this year, though only two respondents predict a 2021 public bond default.

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