- ORIGINAL NEWS
China may have to brace for a new wave of bond defaults, S&P says
- SUMMARY
China’s government-controlled economy has fostered a low rate of bond defaults, just 0.2% in 2023.
However, S&P Global Ratings warns that these low defaults may be artificial, induced by government directives to prevent defaults.
This could set the stage for a spike in defaults in the near future, potentially next year.
The absence of market-driven defaults is a cause for concern because it suggests distortions in the economy.
The government’s attempts to curb risk, particularly in the real estate sector, have had unintended consequences, leading to a downturn in the property market and dragging down the economy.
Real estate and other struggling sectors, such as tech services, consumer, and retail, contributed to bond defaults in 2023.
Slowing economic growth exacerbates these vulnerabilities.
The stabilization of the real estate market, which accounts for a significant portion of household wealth in China, is crucial for easing the negative effects on the economy.
While some analysts remain optimistic about sectors such as consumption, it remains uncertain whether they can offset the drag from real estate and stimulate overall growth.
UBS has upgraded its outlook for China and Hong Kong stocks, citing improved corporate earnings and the potential for dividend payouts.
However, the bank cautions that positive surprises on shareholder returns may be part of a trend of market reforms and should be monitored.
In summary, China’s state-directed economy has artificially suppressed bond defaults, creating the risk of a wave of defaults in the future.
The real estate slump and slowing growth pose challenges that the government must address through comprehensive strategies that include stabilizing the property market and promoting innovation and productivity growth.
- NEWS SENTIMENT CHECK
- Overall sentiment:
neutral
Positive
“UBS on Tuesday upgraded MSCI China stocks to overweight due to better corporate earnings performance which are not affected by property market trends.”
“The largest stocks in the China index have been generally fine on earnings/fundamentals. So China underperformance is purely due to valuation collapse”
Negative
“China’s state-directed economy may be creating the conditions for a new wave of bond defaults that could come as soon as next year, according to an S&P Global Ratings report released Tuesday.”
“It would be the third round of corporate defaults in about a decade, the ratings agency pointed out. It comes against a backdrop of extremely few defaults in China amid concerns about overall growth in the world’s second-largest economy.”