The impact is beginning to show.
Over the past four days alone, three private Chinese companies have defaulted on debt, telling their bondholders that they cannot make repayments, according to data compiled by S&P Global. So far this year, 13 companies have defaulted on bonds, with the pace quickening in recent weeks. Defaults were rare or nonexistent in earlier years, in part because local authorities pressured lenders to forgive or extend missed payment dates to preserve jobs and keep the economy stable.
“The intensified regulatory control on shadow banking activities have largely shut down this alternative financing channel,” said Ivan Chung, associate managing director of Greater China credit research at the ratings agency Moody’s. “Weak issuers are more vulnerable to default pressure,” he added.
Bankruptcies have shot up, too, with new cases growing by more than half in 2017 compared to the previous year, according to a study by Orient Capital Research. In its report, the research firm said it expected to see a significant increase in defaults by Chinese companies again this year.
Overall borrowing has become more expensive for many companies. Bond rates are rising, too, making it more costly for companies to tap that source of money.
The Chinese government is playing a careful game. Even as it allows more defaults, last month it poured more money into the financial system to contain the potential damage.
It is also sparing larger companies like Anbang. With about 35 million policyholders, Anbang could shake China’s financial system if it collapsed.
“With smaller companies, they are not necessarily going to step in,” said Fraser Howie, a former banker in Asia and a co-writer of three books on the Chinese financial system. He added, “What you’re seeing is that the government is allowing some of them to fail. There are lots of private companies that are defaulting on a daily basis.”