China Likely to See More Bond Defaults, Fitch's McCormack Says

(Bloomberg) -- More corporate defaults in China wouldn’t be a surprise as debt levels are unsustainable and the economy is slowing, says James McCormack, global head of sovereign ratings at Fitch Ratings Ltd.

While he doesn’t expect a major credit event in China, the corporate debt problem is getting bigger in the medium-term, McCormack said in a Bloomberg Television interview Thursday from the Boao Forum for Asia, an annual conference on the southern Chinese island of Hainan. Shorter-term issues around wealth management products and leverage inside the financial system are worrying, and a coordinated regulatory response to the problems would be “good news,” he said.

“It opens the system up to contagion because if there’s just a small securities firm that runs into trouble and then it feeds into a local bank and then that feeds into another bank, that’s the problem that China potentially faces,” McCormack said. “Not knowing who the parties are is part of the problem at the outset, and getting the liquidity to where it’s needed could be challenging” for the People’s Bank of China, he said.

China’s banking regulator this month outlined wide-ranging efforts to rein in financial risks, including clamping down on shadow lending and curbing funding for property speculation. Guo Shuqing, days into the job as China Banking Regulatory Commission chairman, said he will coordinate with other financial authorities, including the PBOC, to plug loopholes in regulations for cross-market financial products and update outdated risk management rules.

Read more: China’s Leverage Love Affair Is Tricky to Break, PBOC Finds

WMPs are somewhere in the order of 40 percent of gross domestic product and that’s worrying because regulators probably aren’t “entirely on top of” that issue and the leverage inside the financial system itself, McCormack said, adding that the problem is getting bigger.

The onshore debt market suffered at least 29 defaults on notes in 2016, compared with seven in 2015, according to data compiled by Bloomberg. So far this year there have been at least eight onshore defaults. Outstanding credit in China is equal to about 264 percent of GDP, up from 160 percent in 2008, Bloomberg Intelligence estimates.

To contact Bloomberg News staff for this story: Jeff Kearns in Beijing at jkearns3@bloomberg.net, Stephen Engle in Beijing at sengle1@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Emma O'Brien, Chris Bourke

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