China's Debt Maturity Problem Has Arrived
We have discussed the seemingly irrepressible demand to lend companies money (for the implicit FX trade) in Dim Sum bond format a number of times and in the last few weeks yields on these bonds have risen further as the reality of a notable contraction in mainland credit conditions (along with a rationalization of the lax restrictions within the bonds themselves) starts to hit investors. Overnight, Bloomberg reports that Shandong Helon, a Chinese fiber maker and the first to lose its investment-grade rating (fallen angel), missed a 397mm Yuan loan payment, only serving to further stoke fears of the knock-on effects of a slowing Chinese economy dragged lower by global growth fears (except for the US which is off in faerie land), as ratings downgrades surged last year. Incredibly, no Chinese company has defaulted on its domestic debt since the country's central bank started regulating the market in 1997, according to Moody's but as Bloomberg notes, there is some 2 trillion yuan of bank facilities set to mature in 2012, compared to 33 billion yuan of bonds - leaving a very crowded-out market of shorter-dated debt rolls soaking up what little credit is willingly available. With Dim-Sum bond yields (based on our index of sizable issues) up over 30% (80bps) from early September and European-based USD strength slowing any CNY-FX decay these holders hoped for, we agree with Gao Zhanjan (of Citic Securities), via Bloomberg, that "there will slowly be more substantive defaults in the future".
While demand for Dim-Sum bonds has remained (and issuance steady) there has been a notable rise in yields as investors start to realize how the lax-covenant restrictions combined with a slowing Chinese economy (and a bank loan roll that is simply huge) will reduce creditworthiness. The hopes of an implicit FX trade gain on these bonds also faces pressure as USD safety flows slows CNY appreciation (and obviously credit losses will hugely outweigh any FX gains overall).
Chinese corporate bond downgrades have surged this year - as Bloomberg notes that:
Investors are growing increasingly concerned that downgrades and defaults will proliferate after China’s import growth fell to a two-year low in December and as the economy expands at its slowest pace since 2009.