China Bond-Sale Cancellations Soar As BofA Warns "Default Risk Is Mispriced"

While BofA's base-case calls for "no crisis," the soaring levels of bond-sale cancellations hitting the non-government credit markets is starting to make Asia strategist David Cui nervous...

Year-to-date, 241 non-government bond issuances had been cancelled or postponed; 120 so far in April alone, vs. 315 in total in 2015 (Chart 1). At this stage, the situation appears manageable – in April month-to-day, issuers successfully sold 709 bonds (worth Rmb1.04tr), so the success rate is still above 85%. That said, if, contrary to our expectation, the bond market indeed corrects sharply, finances of developers, banks, brokers, industrials and utilities may suffer disproportionally, by our assessment, because they are highly geared and they have heavily relied on bonds recently.

Bond default risk is mispriced: A perceived implicit government guarantee on bonds and other moral hazards in the shadow banking sector, including wealth management products, is largely behind the mispricing, in our view. There also appears to be noticeable bond-rating inflation, in our opinion.

And the wall of maturing debt that will need to be rolled/refinanced is about to peak...

 

Especially troubling for energy, industrials, and materials companies who are about to face a dramatic drop in their underlying commodity valuations...

 

 

BofAML's base case is no crisis over the next few months, but risk exists: We expect the government to inject enough liquidity and to bail out enough bonds to prevent a credit crunch in the bond market this round. However, the risk exists that the government could mismanage. Also, restrictions on how much the government can loosen and stimulate are getting tighter, in our view, due to the high debt level, the pressure on RMB and, possibly, inflation/asset speculation risk.