In September 2023, a residential tower was under construction in the Phoenix Palace project developed by Country Garden Holdings Co., Ltd. in Heyuan City, Guangdong Province, China.
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BEIJING — China’s state-led economy may be setting the stage for a new wave of bond defaults as soon as next year, a report from S&P Global Ratings showed on Tuesday.
The rating agency noted that this would be the third round of corporate defaults in about a decade.
Against this backdrop, China’s default rate is extremely low amid concerns about overall growth in the world’s second-largest economy.
“What policymakers really need to focus on is whether the current directives are creating distorted incentives for the economy,” Chaoyang Zhang, head of Greater China at S&P Global Ratings, said in a phone interview on Wednesday.
Standard & Poor’s data shows that China’s corporate bond default rate will drop to 0.2% by 2023, the lowest level in at least eight years and far lower than the global default rate of about 2.6%.
“To some extent, this is not a good sign because we do not believe that this difference is the result of market operations,” Zhang said. “Last year we saw governments issuing directives or guidance to prevent defaults in the bond market.”
“The question is: What happens to the bond market when the guidance to avoid defaults in the bond market ends?” he said, noting that was something to watch next year.
In recent years, Chinese authorities have emphasized the need to guard against financial risks.
But a heavy-handed approach to problem-solving, especially in real estate, can have unintended consequences.
Over the past three years, Beijing has cracked down on developers’ heavy reliance on debt, causing the property market to plummet. The once-large industry has been a drag on the economy, and the real estate sector shows few signs of improvement.
S&P said the housing sector led the latest wave of defaults between 2020 and 2024. Prior to this, their analysis showed that industrial and commodities companies defaulted the most between 2015 and 2019.
“For the government, the bigger question is whether the real estate market can be stable and whether housing prices can be stable,” Zhang said. “This may mitigate some of the negative wealth effects we have seen since the middle of last year.”
The majority of Chinese household wealth comes from real estate rather than other financial assets such as stocks.
economic growth concerns
S&P found that bond default rates fell last year in most industries except technology services, consumer and retail.
“This signals a potential vulnerability to the slowdown in growth we are seeing now,” Zhang said.
China’s economy grew 5.2% last year, Beijing sets target The GDP growth target in 2024 is about 5%. Analyst forecasts are generally close to or below that pace, with economic growth expected to slow further in coming years from the double-digit gains of past decades.
China’s massive public, private and hidden debt has long raised concerns about potential systemic financial risks.
Vitor Gaspar, director of the International Monetary Fund’s fiscal affairs department, told a conference that China’s debt problems are not as urgent as Beijing’s need to address its real estate problems in a broader “comprehensive strategy.” press conference last week.
Other aspects of the strategy include China’s emphasis on innovation and productivity growth, as well as the need to strengthen the social safety net to make households more willing to spend, he said.
It remains to be seen whether other sectors can offset the real estate sector’s drag on the economy and boost overall growth.
UBS upgraded MSCI China’s stock rating to “overweight” on Tuesday, citing better corporate earnings performance and being unaffected by real estate market trends.
Sunil Tirumalai, chief GEM equity strategist at UBS, said in a report, “The largest stocks in the China index have generally performed well in terms of earnings/fundamentals. Therefore, China The underperformance is purely due to the collapse in valuations “What makes us more optimistic about earnings now are the early signs of a rebound in consumption. “
The bank also raised its outlook for Hong Kong stocks.
When talking about why UBS changed its view on China’s valuation, Tirumalai pointed out that “there is an increasing trend of positive surprises from Chinese companies in terms of dividends/buybacks.”
“If global markets become more concerned about geopolitics, and in a higher-term scenario, greater visibility of shareholder returns could be useful. We will be watching closely for the next steps in market reforms,” he added.
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