China: Don’t fret over an increase in corporate bond defaults

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Corporate bond defaults were once considered a rare occurrence in China. This is because borrowers have historically relied heavily on financial support from stateowned banks in times of trouble. However, things have started to change in the world’s second largest bond market. As Chinese policymakers continue to address issues surrounding a build-up in corporate debt, they have taken steps to remove implicit guarantees, resulting in a higher number of bond defaults. These peaked in 2018, before easing off in 2019, as US-China trade tensions prompted authorities to reintroduce support. Bond defaults have also been absent for much of 2020, as policymakers sought to limit the economic impact of the COVID-19 pandemic. However, these picked up steam again in October and November, exceeding 2018 levels (Chart 1). But are we witnessing such a sharp increase in bond defaults now?