Chinese Bond Default Risk May Be Much Lower Than We Fear

Concerns may be rising over potential defaults in China’s bond market, but the risks may be exaggerated, Deutsche Bank said after combing through the country’s bond issuers.

“Investors seem to have misunderstood the critical difference between debt markets in China and other countries, and as such have overestimated the probability of default,” the bank said in a note dated Monday. “The critical difference lies in the ownership structure of companies issuing these bonds, making the loss induced default ratio much lower than investor perception,” it said.

After conducting a proprietary study of the 2,400 Chinese corporate bond issuers, which have issued around 5,500 bonds, Deutsche Bank believes the eventual default rate may be lower than the global average of 1.08 percent.

The study comes as another Chinese company appears headed for a bond default. Local media reported this week that Zhejiang Huatesi Polymer Technical applied for bankruptcy in early March. The small polyester yarn maker sold 60 million yuan (around $9.7 million) in bonds at 11 percent in January of last year, with the next interest payment due in July and the bonds’ maturity set for next January.

CNBC

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