Rise in defaults could make things even worse for India, China in 2020

Defaults in China will likely rise in both the onshore and offshore bond markets next year amid a tightening in funding.

Market News : Defaults across Asia may be headed even higher next year, with trouble seen especially in China and India. Many investors expect fewer bailouts by the Chinese government after it recently let commodities trader Tewoo Group default in the biggest failure on a dollar bond by a state-owned firm in two decades.

Companies in the region have been on a buying spree fueled by debt. Those factors could make things even worse in 2020 after China onshore defaults rose to a record in 2019.

As some economies in Asia slow, companies are left vulnerable to any tightening in liquidity. A rise in defaults would likely further weigh on investor sentiment, and raise the cost of borrowing for the riskiest firms.

Defaults in China will likely rise in both the onshore and offshore bond markets next year amid a tightening in funding, and weaker state-owned firms and local government financing vehicles may be at risk, according to Monica Hsiao, chief investment officer at hedge fund Triada Capital. The nation’s real estate firms, traditionally seen as the bulwark of the economy, could also be vulnerable.

“We should not assume that the China property sector is immune if conditions continue to tighten for small over-levered developers that do not have stakeholders with strong political ties, for example,” said Hsiao.

A wave of acquisitions has also prompted companies with overextended balance sheets to stumble. Shandong Ruyi Technology Group Co., which made a string of overseas purchases, including U.K. trench coat maker Aquascutum, has been struggling to repay debt. Singapore-headquartered MMI International Ltd., which was sold to a Chinese buyout group, has missed loan repayments.