Worst Defaults in Months Fuel Stress in China’s Credit Market

Chinese local corporate bond defaults are running at the highest levels since the beginning of the year, adding to strains in the world's second-biggest debt market as an unprecedented property market crisis deepens.

Borrowers missed payments on a combined 7.5 billion yuan ($1 billion) of domestic notes in June and July, the worst two-month stretch since last December and January. That’s fueled angst in the onshore market and kept Bloomberg’s China Credit Tracker stress reading at level 4 the past two months. The gauge indicates rising levels of financial strain via a band from 1 to 6.

Pressures could further intensify onshore, with more property firms struggling to meet debt obligations as new-home sales are again falling and China’s economic woes broaden.

Bonds in focus include a 2 billion yuan note from a unit of state-backed builder Sino-Ocean Group Holding Ltd. that was scheduled to mature on Aug. 2. The borrower won a 30-day extension to pay the bond after warning it would default if on-time repayment was demanded. Meanwhile, Country Garden Holdings Co. is seeking to extend a maturing note for the first time, according to people familiar with the matter.

Both developers also face debt pressures in China’s offshore credit market, where overall stress in Bloomberg’s tracker remained at level 3 in July. Repayment worries have fueled an 84% loss the past two months for Country Garden securities in a Bloomberg index of Chinese high-yield dollar notes. Sino-Ocean bonds in the gauge have dropped at least 56%.

Country Garden, which this year lost the title of China’s largest homebuilder by contracted sales, is in the midst of 30-day grace periods on two dollar-bond coupons. A default by the firm “would impact China’s housing market more than Evergrande’s collapse,“ according to Bloomberg Intelligence analyst Kristy Hung.

Creditors of Sino-Ocean, as well as a unit of conglomerate Dalian Wanda Group Co., recently received coupons at the last minute. Weeks earlier, a state-linked developer suspended payments on offshore debt.

Officials also have an eye on local government debt, risks from which the Chinese Communist Party’s top decision-making body vowed in late July to deal with. Bloomberg News reported last week that provincial-level governments will be allowed to raise about 1 trillion yuan to repay the debt of local-government financing vehicles and other off-balance sheet issuers.

A record number of LGFVs were delinquent on a type of short-term debt in July, exchange data show.