China’s Wave of Corporate Defaults Has Some Investors Seeing Dollar Signs

With an increasing number of Chinese companies defaulting on their debts, more and more financial institutions have jumped into investing in junk bonds.

China’s new wave of bond defaults is attracting more institutional investors looking to cash in on the higher yields that typically accompany the securities known as junk bonds.

With an increasing number of Chinese companies defaulting on their debts amid the economic slowdown and the Covid-19 pandemic, more and more financial institutions have jumped into this segment of the bond market.

Some private equity funds, brokerages, asset managers, and even mutual fund firms that had once looked askance at junk bonds have more recently taken to investing in them, several industry insiders told Caixin.

There is money to be made if investors get their timing right. Bonds in default can generate big returns if their issuers eventually pay them off — so long as investors buy in at a bargain price.

Yongcheng Coal and Electricity Holding Group Co. Ltd., a state-owned coal miner, has recently agreed to pay back 50% of the principal on three bonds it defaulted on. That could draw more investors into the market for junk bonds, whose supply has been growing of late.

As of Monday, Chinese companies have defaulted on 155.6 billion yuan ($23.8 billion) of bonds this year, surpassing last year’s full-year record of 149.6 billion yuan and 2018’s 120.9 billion yuan, according to data compiled by financial data provider Wind Information Co. Ltd.

China’s junk bond market has grown in value to about 2 trillion yuan, said Cai Junhua, a manager at Chang Xin Asset Management Co. Ltd.

Still, the market needs a better bond default disposal system to protect investors’ legal rights, central bank officials said in an article last year.

It is necessary to establish a market-oriented risk disposal mechanism and a more efficient judicial procedure for handling default cases, as well as a trading system for defaulted bonds, the officials said.

Han Wei contributed to this report.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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