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China defaults hit record in 2018; pace has tripled in 2019

BloombergBEIJING (Bloomberg) — This year is shaping up to be the biggest by far for defaults in China’s $13 trillion bond market, highlighting the widening fallout from the government’s campaign to rein in leverage.

Companies defaulted on 39.2 billion yuan ($5.8 billion) of domestic bonds in the first four months of the year, some 3.4 times the total for the same period of 2018, according to data compiled by Bloomberg.

The pace is also more than triple that of 2016, when defaults were more concentrated in the first half of the year, unlike 2018. The trend is clear: unless something changes, 2019 will be the new high.

China continues to press banks to extend credit to the private sector, and small and medium-size companies especially.

The latest move came Monday, when the central bank loosened some reserve-requirement rules for lenders. But President Xi Jinping’s team has also focused on shrinking the shadow-banking system, where credit decisions were made with less regulatory oversight and where it was easier to build up unsustainable leverage.

It’s that funding squeeze that explains the default surge that began in late 2017 and continues today. By contrast, 2016 was more a story of China’s push to shrink excess industrial capacity having reverberating effects in credit markets.

“Short bond tenors mean the companies need to refinance frequently,” and weaker ones will likely have difficulty, analysts including Hong Kong-based Nino Siu at Moody’s Investors Service wrote in a note last month. “Banks are reluctant to lend to weaker companies. Additionally, shadow banking, on which weaker Chinese companies rely, continues to contract as the government tightens regulation,” she and her colleagues wrote.

The grandly named Neoglory Holding Group is the main entity for a conglomerate that spans property investments to retailing. Zhou Xiaoguang, dubbed by some in the media as the “queen of custom jewelry” for the accessories part of the business, built the company with her husband after starting off as a street vendor, according to Caixin Media.

One of the three major private companies based in Zhejiang, a coastal province once run by President Xi Jinping and one of the nation’s wealthiest regions, Neoglory has missed payments on 7 billion yuan of bonds in 2019, according to data compiled by Bloomberg.

While some local authorities, along with national ones, have stepped in to shore up troubled conglomerates — for example, Shandong Province came to the aid of China Wanda Group Co. earlier this year — no such rescue has materialized for Neoglory. After years of expansion fueled by leverage, the holding company and three of its subsidiaries have now entered into a bankruptcy reorganization process, according to a statement filed at Shanghai Clearing House on April 29.

Shandong SNTON Group is the biggest of a handful of private companies that sank into bankruptcy in recent months in the eastern province of Shandong.

One outstanding feature of the iron-wire maker has been the extent to which it engaged in cross-guarantees, where firms pledge to back other companies’ debt. That caused the contagion risk that Shandong authorities moved to address by propping up China Wanda.

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 — the equivalent of 35 percent of its net assets as of June 2018, according to a company filing.

China Minsheng Investment Group Corp. was billed as a Chinese version of JPMorgan Chase & Co. by Dong Wenbiao, known as the “godfather’’ of the nation’s private sector.

CMIG’s investments, spanning health care to aviation, were predicated on funding obtained in part through shadow banking, and it’s become a surprise casualty of China’s deleveraging drive.Speech

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