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Chinese companies had record amount of corporate bond defaults in 2019

China’s Bonds Hit New Records in 2019

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China’s economy seems to be doing very well, despite the trade war on going with the United States. Indeed, the country has tripled its bonds in 2018. 

It seems that the trend is on going, as local companies are pressuring banks to increase credits, which would make 2019 the new high.

While President Xi Jinping has focused on changing the “shadow-banking system” where credit decisions are made.

Experts think that this strategy might be toxic for the United States, as issuing too many bonds and offering them to America could surge interest rates, thus hindering the economy. 

A distinct top 3 for companies

According to Bloomberg, 2019 should be “the biggest by far for defaults” in China’s $13 trillion bond market.

Companies defaulted almost $6 billion of domestic bonds since January, which represents 3.4 times the total for the same period of 2018 according to Bloomberg.

This pace is dramatically more intense than in 2016, where the first semester was the most intense bond.  Bloomberg has ranked the companies who have defaulted on the most bonds so far this year.

Property and Jewelry is ranked first. According to Caixin Media, the founder is Zhou Xiaoguang, the “queen of custom jewelry” who now owns Neoglory Holding Group, a conglomerate that gathers property investments and retailing.
Second comes Shandong SNTON Group, an entity of companies who have become bankrupted in Shandong a few months ago. According to Bloomberg’s study,  “SNTON has defaulted on 4.65 billion yuan of local bonds this year, after having once provided some 86 billion yuan worth of debt guarantees”.
Third comes China Minsheng Investment Group Corp. who likes to advertise itself as the Chinese version of J.P Morgan.
Owned by magnate Dong Wenbiao, the group missed a payment to bondholders last January, creating a large surprise among economists. Aside from this incident, the company has decreased its interest-bearing debt by 43 billion yuan since January 2018.

A weapon against the U.S.

China’s economy has been exponentially growing since the early 2000s. As of 2019, the country owns $1.13 trillion in treasurys. According to the Treasurys and the Securities Industry and Financial Markets Association, this is less significant that the American debt – the United States has an outstanding $22 trillion.

However the Chinese debt represents about 17% of several securities held by foreign governments.
When it comes to the United States, China’s “holdings have fallen nearly 4% over the past 12 months even as total foreign government ownership of treasurys has increased by 2.6%”, according to CNBC.

“To me, that is the biggest worry. This is really the biggest weapon they have,” shared Sung Won Sohn, professor of economics at Loyola Marymount University to CNBC. “They need to do more to counter the United States. So if push comes to shove, that’s what they are going to resort to.”

Read on Alvexo: “Trump Slams Fed, Says Stocks Shoule Be 10,000 Higher”

Yuan under surveillance

With such tensions between China and the United States, the Chinese currency might severely be hindered as well. No later than Monday, yuan dropped to its lowest levels against the dollar for more than six months.
The on-shore yuan was then traded at 6.87, about 7 yuan per dollar. Experts have stressed that a “currency war” would not be a good outcome for any of the countries involved. A weaker Chinese currency would be that the exports would be cheaper in dollars.
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Analysts at Macquarie highlighted that “China’s policy-makers have plenty of policy tools to withstand the negative shock from the trade war, but the potential long-term cost is huge. Policy-makers have no choice but to maintain a stable economic backdrop amid the upcoming trade negotiations.”

Last week, tensions between the United States and China escalated as both countries increased their tariffs.

Diplomats hope that they hope that Presidents Donald Trump and Xi Jinping will meet at the upcoming G-20 summit in Japan. White House Economic Advisor Larry Kudlow, said the meeting was likely to happen, although not confirmed yet.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.