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Surprise Consequence of Trade War Is Likely Fewer Defaulters in China

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Surprise Consequence of Trade War Is Likely Fewer Defaulters in China

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China’s increasing need to sustain easier credit conditions as trade tensions escalate is offering a reprieve to the nation’s distressed debtors.

While defaults in China’s $13 trillion bond market have surged this year, and are likely to keep coming, the number of companies that will renege on payments for the first time is likely to fall, analysts say. The tally of first-time defaulters has already dropped to three so far this quarter, down from 12 in January-through-March and 16 in the final three months of 2018, according to data compiled by Bloomberg.

Fewer new defaulters could reduce the number of problem companies investors need to avoid. And reduced worries could bolster the broader corporate debt market, providing breathing space for China’s policy makers as trade tensions with the U.S. show no sign of abating. Economists increasingly see a drawn-out trade war, with more stimulus in need.

“The funding environment is improving,” said Lu Xin, director of fixed income department at Minsheng Royal Fund Management Co. “Overall monetary policies are looser and the crackdown on shadow financing is less strict.”

China this month reduced the required amount that rural commercial banks must hold as reserves, the latest step to counter a slowdown in the nation’s economy.

Continued Fallout

“Companies’ debt-repayment ability is expected to improve,” said Lv Pin, a fixed-income analyst at Citic Securities Co. Most of the recent bond failures are simply continued fallout from the existing delinquents, he said. Since China has adjusted the pace of deleveraging, it will have a less-negative impact on the borrowers, he added.

That’s not to rule out surprises, as Chinese officials’ preparedness to help companies that fall into trouble can be hard to predict. China Minsheng Investment Group Corp., one of the country’s largest private-sector borrowers, upended market participants’ expectations by defaulting earlier this year.

Still, there may be fewer running into trouble. China’s listed companies had enough cash to cover almost all of their short-term debt in January-through-March, the strongest showing in five quarters, according to data compiled by Bloomberg.

The improving funding conditions have shown up in yields. The spread between three-year AA rated bonds -- which are considered junk in China -- over similar government notes has been shrinking to the narrowest since November 2016.

READ: More Than $42 Billion of Chinese Bonds Face Repayment Pressure

“As China is expected to roll out more easing measures to offset the trade tensions --including tax cuts and infrastructure investments -- spreads will likely continue narrowing,” said Wang Qing, chief economy analyst at Golden Credit Rating International Co.

Issuers are taking notice. Domestic corporate note sales have jumped 33% so far this year, to a record high of 4.3 trillion yuan ($623 billion). Analysts are recommending property-developer bonds and debt from local government financing vehicles for higher yields.

“Lower rated bonds sold by Chinese LGFVs and property developers should be the targets if investors aim to achieve extra return,” according to Citic Securities. Prudence is still warranted, they added, as current conditions don’t mean all risks are washed away.

(Adds reference to economist forecasts in third paragraph.)

--With assistance from Lei Mu.

To contact Bloomberg News staff for this story: Tongjian Dong in Shanghai at tdong28@bloomberg.net;Qingqi She in Shanghai at qshe@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net;Molly Dai in Singapore at bdai13@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Lianting Tu, Christopher Anstey

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