Date
30 May 2017
Investors are most concerned about potential defaults by state-backed companies which are supported by fiscal funds. Photo: Xinhua
Investors are most concerned about potential defaults by state-backed companies which are supported by fiscal funds. Photo: Xinhua

Why China’s bond market has a trust deficit

Non-financial companies in Shanghai and Shenzhen have receivables of up to a record 192 days, according to a Bloomberg study.

Since the beginning of April, at least 64 mainland companies have cancelled plans to sell bonds worth a combined 61.9 billion yuan (US$9.56 billion).

The problem is increasing concerns by underwriters and investors over the risk of default.

Compared with a recovering A-share market, the Chinese bond market is experiencing severe headwinds.

After suffering huge losses in the stock market last year, many mainland investors have rushed to bonds or real estate.

While conservative investors may invest in treasury bonds or semi-sovereign bonds, more put their money in corporate bonds and local government bonds for higher yields.

Generally, bonds are more stable than stocks, provided no default occurs.

Still, the mainland bond market is underdeveloped, with problems such as insufficient information disclosure and a poor rating system.

Since 2014, there have been more than 20 bond defaults in various industries such as iron and steel, coal, trade, catering and semiconductor.

Investors are most concerned about potential defaults by state-backed companies which are supported by fiscal funds.

Presently, China’s debt accounts for 225 percent of gross domestic product, one of the highest in the world.

Debts will not disappear; they can only be transferred.

If a crisis happens, banks will become the owners of these debts, and if banks can no longer carry them on their balance sheets, the government will have to step in to clean up the mess.

That means bond investors cannot avoid big losses.

This article appeared in the Hong Kong Economic Journal on April 21.

Translation by Myssie You

[Chinese version 中文版]

– Contact us at [email protected]

MY/DY/RA

head of private banking and trust services at Hang Seng Bank

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