China has its worst-ever start to a year for defaults

SHANGHAI (April 3): China’s deleveraging push has racked up the most defaults on corporate bonds ever for a first quarter, and the identity of the debtors is pretty revealing.

Seven companies have defaulted on a total of nine bonds onshore so far in 2017, versus 29 for all of last year, according to data compiled by Bloomberg. In a sign of the struggles facing China’s old economic model, most of them depend on heavy industry and construction. While it’s still far from a crisis point, the defaults shows how policy makers’ efforts to reduce the liquidity that had propelled the bond market until late last year is exacting casualties.

“Weak companies can’t sell bonds, which adds to the pressure on their cash flow,” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “The pace of defaults will continue. It will be even more difficult for weak companies to sell bonds because corporate bond yields may rise further -- the current yield premium doesn’t provide enough protection against credit risks.”

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