Last year, it was warned that China would soon be bracing for a tsunami of corporate defaults, mainly Chinese businesses that have their debts issued in U.S. dollars.
In the first 10 months of 2018, the Chinese offshore corporate dollar bond (OCDB) defaults totaled $3.4 billion, up from zero in the same time a year ago. The experts now say these defaults will flood the market in 2019 and 2020.
Fitch is now sounding the alarm.
According to the credit agency, Chinese corporate bond defaults surged to an all-time high in 2018. The report notes that 45 Chinese corporations defaulted on 117 bonds with a principal sum of $16.3 billion.
Five sections are contributing to half of the total onshore corporate issuance: utilities, construction, industrial conglomerates, engineering, and multi-sector holdings.
Robert Wenzel, editor of the Economic Policy Journal, has two conclusions to make on this:
Unlike government GDP data in China, which is suspect (and came in at 6.4% growth for the fourth quarter), actual defaults is a real number that does tells us something about the weakening Chinese economy.
Second, based on Austrian school business cycle theory, the defaults are occurring in the capital goods sector which is exactly where you would expect to see them occur in a bust phase of the business cycle.
China’s economic collapse is only beginning.
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