Risk of Defaults in China has Risen

Rating companies say the risk of defaults in China has risen as Premier Li Keqiang pares implicit guarantees for local-government financing vehicles.

The yield premium over the sovereign for three-year AA corporate bonds, the most common grade for LGFVs, widened 21 basis points from last month’s four-year low to 198 basis points on Oct. 9. The State Council said Oct. 2 that the finance arms can no longer raise funds for local authorities, and that the governments have no obligation to repay debt that wasn’t raised to fund public projects. China International Capital Corp. predicts higher yields for new sales, while China Lianhe Credit Rating Co., a Fitch Ratings joint venture, says it can’t rule out defaults.

“The market is entering a new era,” said Chen Jianheng, a Beijing-based fixed-income analyst at CICC. “The time when everybody bought LGFV bonds for high returns without considering credit risks are gone. For any sales in the future, investors will apply a different set of criteria.”

Bloomberg

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.