China’s corporate bond rating downgrades have more than tripled this year, underscoring Beijing’s efforts to reduce risk in the country’s $17 billion credit market following several high-profile defaults.
International ratings agencies and fund managers have long criticized China’s artificially high corporate credit ratings and low default rates, pointing to a lack of transparency and the assumption that the government will bail out troubled companies.
But 366 bonds were downgraded in the first four months of 2021, down from 109 in the same period a year ago, according to data from information provider Wind.
The increase follows a November warning from Liu He, China’s vice premier, that Beijing would have “zero tolerance” for corporate malfeasance following a series of defaults by state-owned companies.
Regulators have pressured debt underwriters, domestic rating agencies and auditors in a bid to encourage faster risk disclosure, analysts said.
Among the hundreds of downgrades this year were bonds issued by HNA, the former acquisitive conglomerate that has struggled with debt and liquidity issues for nearly five years, and Tsinghua Unigroup, a major computer chip investor that has been faced with questions about bond redemptions since 2018.
Charles Chang, head of Greater China at S&P Global Ratings in Hong Kong, said poor risk disclosure by Chinese companies was “starting to get better”.
“If this regulatory push works, you should see an increase in timely actions that signal underlying distress. . . it doesn’t mean there’s an increase in distress, it just means there’s an increase in the indication of that distress,” Chang said.
S&P noted that more than 80% of local ratings of non-financial private issuers in China are rated double-A. Below that rating, Chinese groups cannot issue publicly traded debt.
Five national rating and audit firms contacted by the Financial Times did not respond to requests for comment.
Chinese regulators have struggled for years to improve transparency in the country’s corporate debt market. Growing scrutiny from regulators has become acute for indebted public companies, analysts said.
Attention has heightened since a bond default by state-backed Yongcheng Coal and Electricity in November sent shock waves through China’s financial system.
Some of the defaults could also be due to economic damage from the coronavirus pandemic, analysts said, despite China returning to pre-pandemic economic growth levels in the last quarter of 2020.
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Xiaoxi Zhang, an analyst at Gavekal Dragonomics, said Chinese leaders had identified “hidden debt” as a priority this year and were working to change the market’s perception that many companies carried an “implied guarantee” that the State would bail them out.
“The government wants to take advantage of the strong growth momentum of the post-Covid rebound to address structural issues,” she wrote in a research note.
“But it’s also because the current credit crunch and the withdrawal of supportive economic policies could cause broader financial stress if hidden debt is not well managed.”
However, S&P’s Chang pointed out that default rates in China remain relatively low. “China’s default rates are expected to double or triple to the level you see in the US, Europe and emerging markets,” he said.
Additional reporting by Sherry Fei Ju in Beijing