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China Corporate Bond Defaults Balloon, Complicating Debt Picture

As China continues to weigh how to approach rising corporate debt, new data reveals rising corporate bond defaults this year, according to Reuters on Thursday (Aug. 9).

Sixteen Chinese corporations, most of them private, have defaulted on 34 corporate bonds, reports said. The defaults are now worth $5.5 billion this year, a trend that adds tension to the complex issue of accelerating business borrowing. Reuters compared the 2018 data to last year's, which saw 30 defaults worth $3.81 billion for the entirety of 2017.

Corporate bond defaults seem to be accelerating in China, with more than 40 percent of defaults this year occurring since early June. That rise is, in part, due to multiple missed payments from a single borrower. For instance, Wintime Energy Co., Ltd. missed four payments, reports said, while CEFC Shanghai International Group Ltd. has missed three since June.

The nation is struggling to balance easing credit requirements for corporate borrowers in an effort to jumpstart economic growth, and weighing the potential economic downside of rising debt, defaults and bad loans. Analysis by Fitch last June warned that efforts to curb corporate debt levels could have an adverse impact on the nation's economy.

“China’s corporate debt challenges remain a key downside risk to medium-term growth,” said Fitch Chief Economist Brian Coulton in a report. “Investment needs to slow sharply to reduce corporate borrowing. Such an adjustment would take a big toll on GDP growth, given that business investment is equal to a quarter of GDP.”

The China Banking Regulatory Commission (CBRC) had previously described the nation's corporate debt situation as "grim and complicated" in an issued January report, citing the address of ballooning corporate debt as a top priority for the year.

"Regulators must keep clear heads and cannot be blindly optimistic," the CBRC noted, proposing that corporates should have a cap on credit availability when they have already added significant levels of debt on their books. Regulators are also looking to curb lending for high-risk borrowers, an effort that could lead to restructuring among some large corporate players.

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