Odd Lots How Bond Defaults Are Changing China's Markets
Dec 2, 2019
Jun Pan, a Professor of Finance at Jiao Tong University, discusses the seismic shift in China's corporate bond market. With rising defaults among private companies, the long-held belief in government-backed debt is unraveling. A striking case involves a state-owned enterprise proposing a massive haircut for investors, potentially signaling the first significant default from an SOE in decades. Pan highlights the changing landscape of credit risks, the evolution from bank reliance to market-based lending, and the implications for both domestic and international investors.
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China's Bond Market Pre-2014
- Before 2014, Chinese corporate bond spreads didn't reflect company health.
- This was because defaults were not allowed, creating a "faith-based" market.
Post-2014 Developments
- After 2014, a link emerged between company fundamentals and credit spreads.
- This link, though weaker than in the U.S., marked a promising start for China's credit market.
SOE vs. Private Company Spreads
- State-owned enterprises (SOEs) initially had slightly narrower spreads than private companies.
- This gap widened significantly after 2018, exceeding 100 basis points.