China Set for Record Default, and Appear to Bolster Yuan

July 9, 2018

 

Chinese corporate debt is seeing a record year in terms of defaults, according to data compiled by Bloomberg, with this year’s number of missed payments quickly approaching the previous high with a challenging H2 still to come.

 

Defaults in 2018 have so far come to about RMB 16.5 billion ($2.5 billion) – around three-quarters of the standing record set in 2016 of RMB 20.7 billion – on at least 20 domestic bonds. With a pessimistic outlook for the next six months after signs of an economic slowdown ahead, confidence in Chinese companies’ ability to repay outstanding debts is being shaken. Chinese ratings agency Dagong has accelerated its downgrading of mainland firms.

 

While rising tension with U.S. threatening to hurt corporate cash flows, the yuan’s rapid slide follows to pose a new test for Beijing. China’s central bank seemingly stepped in to calm the country’s foreign exchange markets on Tuesday as the yuan continued its plummet with its worst recorded day of trading.

 

Early trading saw the currency drop 0.8% against the dollar before recovering to a 0.3% loss, the Financial Times reports, a sign suggesting the heavy buying of yuan by state banks. Furthermore, instead of just falling relative to the dollar, the yuan also weakened with respect to the currency basket used as a benchmark by the central bank. The Governor of the People’s Bank Yi Gang issued a statement on Tuesday assuring traders that the yuan’s weakness could be traced to a strong dollar and “some pro-cyclical behaviour”, but that China was not facing fundamental economic concerns or capital flow imbalances.

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