IGM Credit, IGM FX and Rates
14 Dec 2020
Concerns over China corporate credit risk have come to the forefront since the beginning of Q4, highlighted by three high-grade issuers' defaults:
1. AAA-rated Huachen Auto Group (onshore),
2. AAA-rated Yongcheng Coal & Electricity Group (onshore),
3. AAA-rated Tsinghua Unigroup (offshore)
Coincidentally, all of these three issuers are state-owned enterprises (SOEs) in nature. This, to a certain extent reflects central government's bias in favour of a return to policy normalisation and possibly a second round of financial deleveraging (following the first round in 2017). Chart 1 shows that China's total debt to GDP ratio may have reached as high as 290% by the end of this year, so there is a need for deleveraging regardless of the defaults YTD being smaller than those in the previous two years both in terms of the total number and the total size of events (chart 2). From the perspective of the policymakers, with various kind of economic activities having returned to their pre-COVID levels, a return of the focus to credit clean-up should be more beneficial to long-term economic development...