Corporate defaults surge

Corporate bond defaults in China have jumped recently, adding to worries about the economic outlook. July is on track to more than double the previous monthly record for the scale of onshore bonds entering default. The economic slowdown that we are forecasting over the coming months will put firms under even greater strain. As things stand though, missed bond payments in China are still remarkably rare. We estimate that the bonds which entered default during the past year account for less than 1% of the value of China’s corporate bond market, much lower than the annual default rate for EMs (on average about 4%). The country’s financial sector is also less vulnerable now to a rise in defaults than a few years ago as tougher regulations have helped to curtail the shadow banking sector’s exposure to the bond market.