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High-yield debt in China

Christine Chen, David Liao and Annie Shen

Fangda Partners

Wednesday 15 May 2019

Does a high-yield debt market exist in China?

Generally, high-yield debt consists of securities (mainly corporate bonds) rated below BBB, or Baa3, by established international credit rating agencies. Issuers rated below investment grade are considered to have a greater risk of defaulting on interest or principal repayments and, therefore, are generally expected to pay higher coupons to investors.

However, unlike most other debt capital markets, the domestic high-yield debt market in China (which for the purpose of this chapter excludes Hong Kong, Macau and Taiwan) is not well defined. This is because the rating scales used by the Chinese credit rating agencies are not comparable to those of international credit rating agencies, and the Chinese regulations require publicly offered debt securities to have a rating of AA or above. Market statistics suggest that over 90 per cent of bonds fall into only three rating categories: AAA, AA+, and AA. The vast majority of domestic bonds are rated AA or above, which means Chinese credit rating agencies pool bonds with different credit risks into same broad rating categories, raising doubts over the accuracy of Chinese ratings. Recent bond default cases did not imply significant differentials among bonds with different domestic ratings. According to the data compiled by Wind Information, a Chinese financial data provider, the number of domestic bonds default cases surged to 119 in 2018 from 35 default cases in 2017. Most of these issuers were rated AA and above before defaults.

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