China’s fragile economic recovery is ushering in a dangerous new phase for the nation’s $4.1 trillion corporate bond market.
With the economy now strong enough for policymakers to dial back financial support but still too weak to save the most distressed borrowers, some fund managers are bracing for defaults on domestic Chinese debt to hit record highs this year. Delinquencies have already started rising after a remarkably quiet second quarter, and pressure on borrowers is set to grow as 3.65 trillion yuan ($529 billion) of notes mature by year-end.
While few see a crisis in the offing, debt specialists at SC Lowy and Adamas Asset Management are becoming more selective in China, arguing that the government-induced calm in local credit markets is unlikely to last. Analysts say nonstate companies, lower-rated developers and some local government financing vehicles are particularly vulnerable as borrowing costs climb and refinancing becomes more difficult.