China has ridden out a bond default wave, but the market must be wary of potential pitfalls in a small group of risky issuers and threats from non-property sectors, according to a recent report.

Bond default in 2024 reached a trough. The default rate of US dollar-denominated Chinese bonds fell to 0.5%, finds the S&P Global report, totalling US$16 billion, a sharp drop from the peak of 6.7% or US$71 billion in 2022.

The default rate of the yuan-denominated property bonds declined to 2% from the 9.9% peak in 2022, the report notes, while the non-property counterpart reached 0.2%, compared with the peak of 1.2% in 2019. The average outstanding amount defaulted this year is down 83.8% to 1.5 billion yuan ( US$210 million ) compared with 2022’s peak. The share of defaulters in the property sector has also gone down from above 10% in 2022 to below 2% in 2024 year to date.

“The large majority of bond issuers that previously issued onshore or offshore have now defaulted out of the portfolio,” says Charles Chang, S&P Global’s Greater China country lead. “They are now no longer able to issue, so the default rates as such are going to fall.” And 80% of the Chinese issuers in the international markets, he adds, are now investment grade and proven capable of taking the pressure domestically and internationally.

More onshore defaults are resolved compared with offshore, 76% to 45% respectively. Amid the yuan-denominated bonds resolution, out-of-court settlements tripled the number of in-court resolutions. The difference was even more extreme in the real estate subsector, seeing merely 0.4% of in-court resolutions while the rest opted for out-of-court settlement. The potential reason is the 13 times lengthier court process compared with the time needed to reach investor consent.

The drawn-out court process also happened in offshore bonds. Court processes in the property and non-property sectors were 25 times and six times lengthier than the out-of-court procedures. But the two forms of resolution remained fairly distributed, with the court restructuring ratio accounting for 19% and the out-of-court ratio, 23%. Liquidations, accounted for 3% of total offshore resolutions, which only transpired in property bonds.

Out-of-court resolution helped avert cash settlement, particularly in the real estate sector, given their cash-strapped situation. Onshore bond settlement saw 84% opting for maturity extension solely, while offshore witnessed a mix of maturity extension and bond exchange. Merely 5% of the offshore real estate bonds preferred tender offer, compared with 42% in the less strapped offshore non-real estate sector.

As long as the court is involved, the chance of cash settlement will be enhanced. Over three-quarters of offshore bonds opted for mixed payment of cash and other assets, including 87% of real estate bonds, five times more than the bonds recorded without court involvement. For yuan-denominated bonds, more than two-thirds were settled with cash and other assets after court intervention, and all onshore real estate bonds were able to be resolved with cash and shares.

Although the Chinese bonds witnessed the greatest improvement over this decade, a slight uptick is seen in the non-property defaulters in 2024, which rekindled the worries of a new wave of defaults. 

“We do notice some new defaulters in other sectors, such as tech service, tech hardware and chemicals,” shares Chang Li, S&P Global’s China country specialist. “This is mainly due to the slowing economic growth and overinvestment risk that have negative impacts on profitability and cash flow.”

Looking forward, apart from the consumer sectors that will be further strained under a weakened economy in 2025, local government financing vehicles ( LGFVs ) also appear to be on a bumpy road in deleveraging. The market is advised to stay nimble regarding the risky sectors and aggravating factors, including political risks.