Aidan Yao

Macroscope | Bond defaults in China are a necessary pain for a healthier economy

Aidan Yao says the rash of defaults in the corporate bond market, a result of Beijing’s deleveraging drive, must be tolerated to reap longer-term rewards

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People touch a bull statue on display outside a mall in Beijing, on June 18. A structural reshaping of the market will cause short-term pain, but rising defaults in the credit market suggest that the authorities are allowing the market to better price risks, which will only make the economy healthier. Photo: AP

Aidan Yao

Published: 12:02pm, 20 Jun 2018Updated: 10:54pm, 20 Jun 2018

A recent concern in China has been the rising number of defaults in the onshore bond market. Thirteen issuers have defaulted on around 20 billion yuan (US$3.1 billion) worth of corporate bonds so far this year, up more than 30 per cent on the same period last year.

These defaults are a by-product of Beijing’s deleveraging drive, which has tightened funding conditions for companies. If the risk is not carefully managed, some fear that the defaults could wreck the financial system and put the real economy at risk.

In contrast to those gloomy views, rising defaults in the credit market could be deemed a healthy development. They suggest that the authorities are actively removing implicit guarantees and allowing the market to better price risks.

Granted, such a structural reshaping of the market will cause short-term pain, as defaults and bankruptcies create stress for the system. However, it is worth noting that the amount of corporate bond defaults so far represents only a tiny part – 0.08 per cent, to be precise – of China's US$4 trillion corporate bond market.

Moreover, the People’s Bank of China has already started to fine-tune its monetary policy by injecting liquidity via the reserve requirement ratio and medium-term lending facility, suggesting that the authorities are proactively managing downside risks for the economy.