Although China is the only major economy that will most likely post GDP growth this year (estimated at 1.9%), its bond market is seen facing strong headwinds in 2021. It is forecast that bond defaults in the Asian giant will continue to rise, with Chinese corporate bond issuers more at risk than their state-owned peers, based on data from Moody’s Investors Service.

This is due to the general financial nature of private companies in China which normally rely on short-term funding and have weaker corporate governance structures. “Although the government’s liquidity measures helped some companies avoid default by enabling short-term refinancing, they did not significantly support long-dated onshore bond issuance,” explains Ivan Chung, associate managing director at Moody’s. “And this reliance on short-term funding paves the way for recurring refinancing needs, raising the default risk for financially weak companies.”

Another financing hurdle facing Chinese private corporate bond issuers is weaker demand for their bonds, despite an increase in foreign investors flocking to the Chinese onshore bond market in search for attractive yields. A vast majority of these foreign investors have participated in central government bonds and bonds from quasi-sovereign policy banks, according to analysis from Fitch Ratings.  

The expectation of additional bond defaults in China’s private sector has prompted organizations like the International Monetary Fund to call for reforms in the country’s onshore bond market to protect foreign investors such as access to hedging tools, further clarity around local bond ratings, and further liberalization of China’s capital account.

Despite these issues, China has nonetheless introduced measures to reform the bond market. In July 2020, the Shanghai and Shenzhen stock exchanges under the China Securities Regulatory Commission (CSRC) released formal rules on corporate bond exchanges, an understanding that bond exchanges must be conducted on a voluntary and equal basis. Around the same time, the People’s Bank of China issued a notice detailing the principles for bond defaults and the responsibilities of the various parties involved.