S&P Global Ratings, a leading credit rating agency based in the United States, has issued a cautionary report indicating that China may face heightened risks of new bond defaults as early as next year, citing factors stemming from its government-controlled economy. This potential default would mark the third instance of bond payment defaults by Chinese companies within a decade.
Charles Chang, head of China and Greater China at S&P Global Ratings, underscored the importance for Chinese policymakers to closely monitor whether current policies are generating distortions in the Chinese economy, potentially exacerbating the risk of bond defaults. S&P’s report, released on Tuesday, April 23, highlights concerns about the sustainability of China’s economic stimulus measures.
According to S&P Global Ratings data, the default rate of Chinese companies dipped to 0.2% in 2023, marking its lowest level in over eight years. However, this figure remains significantly lower than the global default rate, which stands at approximately 2.6%.
Chinese authorities have been vigilant in addressing financial risks in recent years. Yet, proactive measures, particularly in managing issues within the real estate sector, may inadvertently trigger unintended consequences. China’s real estate market has experienced a downturn following governmental crackdowns on debt-reliant real estate developers over the past three years, exerting considerable strain on the once-thriving sector and contributing to economic challenges. Despite efforts to stabilize the real estate market, signs of recovery remain elusive.
S&P Global Ratings highlighted that the real estate crisis has been a primary driver behind the recent wave of bond defaults observed between 2020 and 2024. The first wave of bond defaults, occurring between 2015 and 2019, predominantly involved industrial and commodities companies.
As China grapples with ongoing economic challenges, including those in the real estate sector, vigilance and proactive measures will be crucial in mitigating the risk of further bond defaults and fostering economic stability in the years ahead.