Following a wave of bond defaults last year, how has the bond market held up in the first half of 2019? Also, what’s the significance of regulators’ efforts to break the “implicit guarantee” that the government will bail companies? Recently, Caixin asked Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC) in charge of financial markets, for answers to these questions.
Caixin: How do you view the wave of bond defaults?
Pan: Bond defaults are normal, and it’s unhealthy for a market not to have any defaults. In the past, many investors believed that bonds could not default and thus invested in bonds regardless of their ratings. However, now that the implicit guarantee — that investments will be bailed out if they sour — is broken, the pricing mechanism in the bond market can be corrected to truly reflect credit risks. We should view the default situation in an objective manner, as defaults are beneficial to the long-term development of the bond market and to a more efficient allocation of financial resources.
We can analyze defaults from multiple angles. First, the market saw total bond defaults worth 101.4 billion yuan ($14.6 billion) throughout last year, while in the second half of last year, the market saw 81.7 billion yuan in bond defaults, accounting for 81% of the total value of bond defaults in the year.
In the first half of this year, the value of bond defaults dropped to 44.2 billion yuan, down 46% compared with the second half of last year. The total size of defaulted bonds in the second quarter this year shrank by 14.7 billion yuan compared with the first quarter. Also, of the 32 companies that defaulted in the first half of this year, 10 had defaulted before, meaning that emerging risks were much smaller than they may have seemed.
Secondly, the overall default rate in the Chinese bond market is not that high. Compared with credit loans, at the end of 2018, the value of credit bond defaults accounted for 0.79% of the balance of credit bonds, while the ratio of nonperforming loans in China’s banking industry was 1.89%.
The credit loan market relies mainly on lending institutions’ decision-making, and in the event of a default, they can deal with risks through extensions, debt restructuring, and there’s no requirement to disclose any information. However, the bond market values information disclosure and external ratings, and has higher transparency, which could make it harder for a defaulted company to raise money later.
On a global level, the default rate of the Chinese bond market isn’t high compared with the international standard. According to Moody’s, the default rates in the international bond market in the past few years fell between 1.12% to 2.15%, approximately double that of the Chinese bond market. That said, the current bond default situation is generally within a normal range.
Do you think the mechanism for bond defaults is good enough?
According to preliminary statistics, of all the companies that defaulted on credit bonds, only a small number have repaid their debt or reached a reorganization plan. The low efficiency of tackling defaults can jeopardize investors’ enthusiasm, make it hard for companies to raise money through bond issuances, as well as increase their financing costs.
At present, the PBOC is working with relevant departments and the supreme court to study the legal issues surrounding bond defaults, and meanwhile strengthen the supervision of issuers and intermediaries. Also, the PBOC is actively developing a defaulted bond trading market, and researching the introduction of market-based bond default disposal methods.
This article has been edited for length and clarity. Read the full interview later on Caixin Global.
Translated by Timmy Shen (hongmingshen@caixin.com, Twitter: @timmyhmshen)
