Implications from rising corporate bond defaults in China (12/2020)
US sanctions scare investors away from China’s corporate bond market
As tensions between the United States and China continue unabated, the threat of new duties and sanctions on Chinese companies is beginning to reveal problems in the Chinese market for US dollar-denominated corporate bonds..
Since 2018, America has imposed more than $ 550 billion in additional tariffs on Chinese goods, while Beijing has responded with similar measures worth $ 185 billion..
This year, the Pentagon has identified 31 leading Chinese companies on the list «military communist enterprises». Separately, the Department of Commerce added 24 Chinese firms to the list of legal entities with which it is prohibited to conduct partnerships and trade relations.
American designations are laying the foundation for financial sanctions against these companies, forcing investors to think hard before investing in the Chinese market, fearing the prospect that bond issuers will be punished by the US and suffer reputational damage, analysts say..
«If the US decides to block the leading Chinese corporations from dollar funding, then everyone will simply have to stop trading their bonds the very next day. This has not happened yet, but some traders are already wondering what is the point of buying corporate bonds now.?», – He speaks Vivien gui (Vivien Gui) in charge of fixed income investments at Wu Capital.
Amid the economic recovery, China’s overall US dollar-denominated corporate bond market has not been hit hard by the threat of a financial divide between the two countries. However, there is growing pressure and a decline in prices, which forces some investors to continue to get rid of securities in anticipation of an escalation of US-Chinese tensions..
For example, $ 900 million bonds with an interest rate of 3.875 percent sold by CNAC (HK) Finbridge Company, a subsidiary of ChemChina, which expire in June 2029, are trading 6% below their peak price reached in August..
Huawei Investment and Holdings’ $ 1bn at 4.125% Bonds due to expire in May 2025, down 5% from March high.
Sinochem International Development’s $ 300 million at 3.125 percent bonds due July 2022 also trade below their May peak.
The Pentagon’s actions do not guarantee new sanctions, but the country‘s law says that the president can declare a state of emergency, which will allow him to punish any companies on the list that operate in the United States. As a result, the assets of legal entities and individuals may be frozen, and US residents will generally be prohibited from dealing with them..
The State Department this week blacklisted six more companies and two Chinese citizens for dealing with the Iranian shipping company Islamic Republic of Iran Shipping Lines.
Tech companies, banks and state-owned enterprises are key targets for US sanctions affecting the price of their bonds in the Chinese market, says Hua cheng (Hua Cheng), AllianceBernstein Corporate Lending Analyst.
«As tensions between the US and China may escalate ahead of the elections, we believe caution is warranted. US is suspicious of Chinese state-owned companies due to possible links to government and party», – he added.
Given the rise in debt burdens for many Chinese enterprises, it is unclear how many Beijing will be prepared to bail if they find themselves cut off from their funding channels despite their strategic and economic importance..
US dollar bond issuance by Chinese firms rose 146% to $ 123 billion in the five years to 2019, according to Refinitiv data.
«The question is whether central bank intervention is delaying credit losses and balance sheet pressures on the private sector. Restructuring may need to be part of the solution at some point as debt continues to go to the point of no return», – stated Joanna Chua (Johanna Chua), Head of Asia Pacific Economics and Market Analysis, Citigroup Global Markets Asia.
Sophia Xia (Sophia Xia), co-head of China restructuring at Houlihan Lokey, expects China’s corporate bond defaults to rise as companies cannot get funding to continue paying off debt while their profits are suffering from slow business recovery.