Are Recent High-Profile Bond Defaults A Threat To China’s Outlook?

A number of high-profile Chinese state-owned enterprises defaulted in November 2020, notably Yongcheng Coal and Electricity Holding Group, Tsinghua Unigroup, and Huachen Automotive Group. There has been concern around the level of Chinese debt for a long time now, and 2020 saw even more debt added to the system. Importantly, however, we think that these defaults need to be considered in the context of a financial system that is maturing and opening—in addition to the economic recovery taking place. Ultimately, we do not think the recent string of defaults poses a systemic risk to China.

China 2021 growth outlook

Before we dive into the reasons why let’s back up a bit and take a look at the broader outlook for China this year. Above all, we expect the Chinese economy to experience a solid year of growth. The International Monetary Fund (IMF) is currently forecasting 7.9% real GDP (gross domestic product) growth in 20211—well above-trend growth. This should flow on to the rest of Asia, given how interrelated Asian trade is. Fiscal policy will also remain supportive, and we expect to see more targeted measures to boost household consumption at the March National People’s Congress.

On the other hand, we continue to think that monetary policy is going to become less accommodative. Importantly, we’re seeing early signs that the upswing in the credit cycle is now easing.

On an international level, while risks around China’s relationship with the U.S. remain, our baseline expectation, for now, is that tensions between the two nations should ease a little bit this year—which should be a positive. It’s important to note, however, that we don’t foresee a return to the pre-Trump era of China-U.S. diplomacy—which means there will still likely be several secular issues that will be difficult to resolve.

Is market concern over the recent defaults warranted?

Let’s turn our attention now to the recent string of high-profile defaults among state-owned Chinese enterprises. To us, the events feel very similar to the events of 2019, where we saw defaults amongst Chinese banks. At the time, we stated that we thought the risks around Chinese debt were overblownWe continue to think that, in the near term, this is still the case. In fact, when viewed through the lens of the market maturing and becoming more open to overseas capital, these defaults are actually positive in a way. Why? Because they show that the Chinese government is keen to exert a bit more capital discipline (rather than simply bailing out businesses whenever they land themselves in distress).

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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

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