The risk of default in bond market in the near future
Li Peijia, senior research fellow, Institute of international finance, Bank of China
Lou Feipeng, researcher of Postal Savings Bank of China
Recently, the default events of credit bonds represented by brilliance auto, Ziguang group and Yongcheng Coal and power holding group have caused fluctuations in the bond market. The financial stability and Development Commission of the State Council (hereinafter referred to as “the financial commission”) recently held a meeting to study and standardize the development of the bond market and maintain the stability of the bond market, and put forward five requirements.
It is worth noting that, with the slowdown of domestic economic growth and profound and complex changes in the situation at home and abroad, since 2018, China’s bond default risk has increased significantly, the number and scale of bond default have increased, showing the characteristics of normalization of default events and diversification of default subjects, and private enterprises have become the disaster area of bond default. Different from previous years, in 2020, local state-owned enterprises and high-grade bond subjects increased significantly. On November 12 alone, about 20 high-grade bonds defaulted, and a large number of enterprises were forced to cancel or postpone the issuance of bonds.
So, what are the main reasons for the recent bond market defaults? What kind of signal has been conveyed to the market by the five points clearly proposed by the recent meeting of the financial commission? In the future, how to improve China’s credit system to maintain a good credit environment and financial ecology?
In response to these hot issues, Li Peijia, a senior researcher at the Institute of international finance of the Bank of China, and Lou Feipeng, a researcher at the postal savings bank of China, recently received an exclusive interview with reporters from the financial times.
Financial Times reporter: what do you think are the main reasons for the recent successive defaults on credit bonds? Why has the default subject of local state-owned enterprises and high-grade bonds increased significantly since this year?
Lou Feipeng: on the whole, the recent increase in the default of state-owned enterprises’ credit debts is the result of the joint action of macroeconomic environment, micro entities of enterprises and institutional factors. Novel coronavirus pneumonia exacerbates this trend from the macroeconomic environment. The emergence of the new default of the bond is generally lagging behind the economic growth of 2 to 3 quarters. This leads to the current capital pressure and credit quality deterioration of some enterprises.
From the micro level, the state-owned enterprises themselves have a high leverage ratio and face greater pressure of deleveraging. In the face of operational pressure, some enterprises have low subjective willingness to pay, so they can not rule out the suspicion of “escaping or abandoning debts”. For example, some state-owned enterprises have stripped the high-quality assets of the issuing entity and transferred the assets by various means before breaking the contract. From the system level, with the continuous progress of breaking the “rigid exchange”, the implicit guarantee and soft budget constraints that state-owned enterprises rely on are gradually solved, which will inevitably lead to debt problems.
Li Peijia: the causes of bond default are complex and related to many factors. On the one hand, the economic downturn superimposed on the impact of the epidemic, enterprise accounts receivable cycle lengthened, repayment pressure increased. At the end of September 2020, the average payback period of industrial accounts receivable is 54.6 days, which is significantly lower than that of 71.3 days at the beginning of this year, but it is still a relatively high point in recent years.
On the other hand, some enterprises maliciously “evade debt”. Since the second quarter of this year, the pace of China’s economic recovery has been significantly accelerated, and most enterprises’ operating conditions have been continuously improving. At this time, a large area of bond default suddenly appears, which deviates from the trend of economic recovery. This has to make people think whether there is malicious debt evasion.
Financial Times: in your opinion, what is the overall situation of China’s credit market? Is the overall risk controllable?
Li Peijia: we should take a rational view of the frequent default risks in the bond market. On the one hand, we should pay close attention to the chain effect caused by bond default, prevent the risk from transferring to stock market and credit market, especially to prevent the scale contraction of bond market financing caused by the lack of investor confidence; on the other hand, we should also fully realize that bond default is an unavoidable phenomenon in the gradual maturity of the bond market, and the current default in China’s bond market as a whole At a low level, the risk is relatively controllable. As of November 21, 2020, 117 bonds with a scale of 134.9 billion yuan had defaulted, accounting for less than 0.5% of the balance of credit bonds (38.4 trillion yuan).
Lou Feipeng: in fact, it is not the first time that state-owned enterprise credit bonds default. In 2015, there were state-owned enterprise credit bond default events. On the whole, the default rate of China’s credit bonds is generally low, and the margin of default rate has increased this year. To judge the impact of credit bond default on the whole market, we need to consider multiple factors, including whether the default of credit bond exceeds the market expectation, whether it occurs point by point or continuously, the scale of default amount, the bond survival scale of default subject, and so on.
At present, this wave of bond defaults has exceeded market expectations. Many credit bonds in the primary market have been cancelled. The secondary market has seen higher yields and wider spread volatility. However, in general, China has continued to promote the prevention and resolution of major financial risks, and the debt risks of large and medium-sized enterprises have been resolved in an orderly manner. Although the default of state-owned enterprises’ credit bonds has caused certain impact on the market in a short period of time, there is still a large distance from the occurrence of systemic financial risks. The people’s Bank of China has also stabilized the liquidity through open market operation in a timely manner, and the liquidity stratification of banks and non banks has also been achieved The overall risk is still controllable.
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