China’s bond market has had a turbulent time in recent weeks following a wave of high-profile corporate bond defaults. Yongcheng Coal and Electricity Holding Group (a state-owned coal mining company), Brilliance Auto Group Holdings (a Chinese automaker), and Tsinghua Unigroup (a chip maker) have all reported bond defaults in the past few weeks. This has unnerved investors, especially in the case of Yongcheng which had been granted a AAA rating by China Chengxin International Credit Rating. There are also wider implications for investors in terms of expectations. It has long been assumed that the Chinese state will step in to prevent large state-owned-enterprise bond defaults, a myth that has been busted in recent weeks. Looking ahead, if this is a change in policy stance, and the government saving the day is a thing of the past, many enterprises are at risk. As our chart shows, a large proportion of industrial enterprises are loss-making; over 40% of them in the worst-affected province in September of this year. This has been exacerbated by COVID-19, but is a persistent trend over time, suggesting many of these firms receive state backing to prevent failure. However, this may not be the end of the story. Shanxi province issued a rare statement in an attempt to calm investors, in which it pledged that companies it controls will not default. It is yet to be seen whether other provinces will follow suit.
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