China’s bond issuers subject to market-driven credit assessments

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Recent default cases related to Chinese state-owned issuers in the offshore market have tested the assumption that state-related issuers always have the support of the Chinese government and their onshore parent companies. This is driving the market to develop a more realistic pricing mechanism for bonds issued by Chinese state-related issuers, with a greater focus on their own credit worthiness, according to a new research report by HKEX’s Chief China Economist’s Office.

This change is timely, because the low cost of US dollar funding since 2010 has prompted Chinese corporates to increase their offshore debt issuance. At the same time, the credit risks associated with increasing Chinese corporate bond defaults in the onshore market have drawn the attention from regulators and market participants. 

Offshore Chinese bond defaults have not been frequent but credit events of various nature have occurred. This demands the market to look beyond the contractual obligations under the various credit enhancement facilities and to better understand the business and economic relationship of issuers with their onshore parents in assessing the credit risks. 

In practice, the support that the Chinese Central Government and local governments offer to their controlled companies in the process of debt restructuring and possible bailout varies to a significant degree across regions and industries, especially in respect to their off-budget borrowing that is largely related to the local economy. 

In the long-run, the establishment of a market-based approach in assessing credit risk is crucial to strengthening market discipline and to allowing market forces to work in risk pricing. This is important in building up financial stability and the sustainable development of the Chinese bond market. 

The Hong Kong market has specialised strengths in assessing the fundamentals of Chinese offshore issuers, which could help investors assess the potential credit risks in Chinese offshore bond issuance and reduce the vulnerability of the financial market to credit events. 

Tap Read More for the full report. 

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