Chinese private companies may face an even more difficult ride in the domestic bond market in 2019 as billions of renminbi in maturing issuance conspire with reduced risk appetite, threatening an even bigger wave of defaults. 

Last year’s Rmb151bn ($22.3bn) in defaults made it a banner year for credit events in the domestic corporate bond market. Ordinarily, this would be welcomed: the first renminbi corporate bond default was as recent as 2014 and was a watershed moment for regulators, who had previously chosen to underpin moral hazard rather than recognise failure. However, nearly 90 per cent of the defaulted paper in 2018 was issued by private sector companies, reflecting how much they have been disproportionately hurt by tightening credit conditions. 

Despite  mixed messages from the government, China’s financial authorities have belatedly recognised the vulnerability of the private sector and pledged support. The People’s Bank of China is lowering the reserve requirement ratio again this month, releasing around Rmb800bn in frozen deposits back into the banking system on the understanding that the funds will support small and private companies. Although more than Rmb3tn was released through this channel last year, bond yields suggest monetary policy easing has not dramatically improved the market conditions for private companies.