China Bond Sales Tumble Most in Five Years as Defaults Surge

(Bloomberg) -- China's corporate bond sales tumbled the most in almost five years in the second quarter as defaults surged, and Industrial Bank Co. expects the difficult market environment to continue.

The nation's companies sold 1.85 trillion yuan ($278 billion) of onshore bonds, a 30 percent drop from the previous three months, according to data compiled by Bloomberg. That was the sharpest quarter-on-quarter decline since September 2011. Issuance is still more than twice of the level four years earlier after rapid expansion in the recent quarters.

At least 11 local companies defaulted on their bonds this year, already exceeding the total tally for 2015 and sapping investor demand for debt securities, as Premier Li Keqiang steps up efforts to reduce overcapacity in corporate sectors. At least 188 companies have scrapped or delayed 210.5 billion yuan of note sales since March 31 after borrowing costs rose amid a market rout in April.

“In the second half of this year, it will be more and more difficult to sell bonds in the primary market,” said Lin Shu, the Beijing-based vice president of enterprise financial headquarters at Industrial Bank. “The government will push forward supply-side reform and default risks will increase with a faster reduction of excess capacity.”

Industrial Bank, based in the southern Fujian province, underwrote 228 billion yuan of bonds regulated by the central bank in the first half of this year, ranking it the third among all the underwriters.

Prevent Risks

“We hope regulators can increase support to prevent any systemic or regional financial risk,” said Lin.
 
The yield premium of three-year AA- rated corporate bonds over similar-maturity government notes has widened 16 basis points this year to 328 basis points, according to data compiled by Chinabond. It narrowed 10 basis points last month, suggesting some recovery in investor confidence.

In the longer-term, Lin said he's optimistic about the outlook for China's bond market. He forecast outstanding notes may expand by more than 50 trillion yuan in the coming five years. The amount was 50.3 trillion yuan as of end of May, according to Chinabond.

“Bond sales will become a major financing channel for Chinese companies,” said Lin. “But underwriters will face serious challenges while the economy is in the current downward cycle.”

--With assistance from Molly Wei To contact Bloomberg News staff for this story: Judy Chen in Shanghai at xchen45@bloomberg.net, Xize Kang in Beijing at xkang7@bloomberg.net. To contact the editors responsible for this story: Andrew Monahan at amonahan@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net, Ken McCallum, Sandy Hendry

With assistance from Xize Kang, Judy Chen