Policy support set to keep bond default risks at bay

Policymakers and local authorities are expected to better manage the pace of the ongoing deleveraging efforts by rolling out more supportive policies to ease growing repayment and bond default pressures, analysts said.

A series of bond defaults earlier this year had sparked concerns that debt pressure would surge rapidly and threaten the nation's overall financial stability. But there have been no such indications so far, they said.

According to data from Wind Info, 24 issuers, mostly private companies, have defaulted on a combined 23.3 billion yuan ($3.5 billion) worth of corporate bonds as of June 22. Concerns had risen as more bonds are expected to mature in the next few months. A total of 2,079 corporate bonds valued at 2.3 trillion yuan need to be repaid in the coming quarter, up 21 percent from the same period last year, Wind Info data showed.

"Low-rated companies with poor performance will continue to face default risks in the second half, but the overall default levels are expected to remain low," said Su Li, chief bond analyst with Beijing-based Golden Credit Rating Co.

"Regulators are lowering the debt levels in a cautious way, and they will not allow the deleveraging process to go out of control."

Some analysts expect the next wave of defaults could be in the real estate sector and local government financing vehicles, as they have relatively easy access to financing－they either get funds from shadow banking channels or use the implicit guarantee from the local governments to borrow.

While the government is likely to stick with reducing leverage levels, regulators are expected to further fine-tune the pace of deleveraging, according to Su.

Starting from earlier this month, the nation's major bond regulators started to collect data on the debt market performance "on a weekly basis", to keep a close eye on potential default risks in different sectors, according to an official responsible for bond approvals who did not want to be named.

Some efforts have already been made to reflect a policy switch from restriction of nonstandard borrowings to expansion of more financing channels to ease funding woes.

Earlier this month, the People's Bank of China, the central bank, decided to expand the scope of guarantee for the medium-term lending facility in a bid to increase support for small businesses.

More measures will come out to further ease financing pressure in the bond market, after the government injected some level of confidence into the market by lowering banks' reserve requirement ratio on June 24, according to Huang Jiacheng, Fidelity International's fixed-income fund manager.

Earlier last month, the National Development and Reform Commission collected opinions from major commercial banks on their efforts to deal with off-balance－sheet lending to ensure that the ongoing deleveraging efforts do not affect the normal operations of the banking sector, according to sources familiar with the matter.