China's private firms face record default risk, to stay high in 2020 - Fitch

SHANGHAI (Reuters) - China’s private companies have defaulted at a record rate this year and could face similar pressures in 2020, rating agency Fitch said on Tuesday, highlighting significant corporate debt risks as economic growth slows to near 30-year lows.

A record high of 4.9% of China’s privately-owned issuers defaulted on onshore bond payments in the first 11 months of 2019, Fitch said in a statement, up from 0.6% of private issuers in 2014.

Privately-owned enterprises (POEs) accounted for more than 80% of bond defaults, whether counting by the number of issuers or the principal amount of defaulted bonds, Fitch said.

Jenny Huang, director of China corporate research at Fitch Ratings, said at a briefing that she expects the POE default rate “to stay at around this record level in 2020.”

China’s mounting defaults reflect the struggles of private firms as a slowing economy and high refinancing pressures make it harder for companies to repay debts and take out new loans.

Weaker issuers will face difficult conditions due to Beijing’s “selective” efforts to support only more-qualified small and private firms, Huang said.

Wang Ying, head of APAC energy and utilities at Fitch, said that although general market liquidity conditions were relatively loose this year thanks to central bank support, banks remained cautious toward some private companies.

“Many private sector companies, the majority of those who are listed on the A-share markets, basically can’t repay their debt with the cash flow from operations. So they all need to refinance,” she said. A shares are yuan-denominated listings on the China mainland.

Wang said bond market financing was also more difficult after the government took over troubled Inner Mongolia-based Baoshang Bank in May, which created a liquidity shock among smaller banks.

Chinese corporate issuers defaulted on onshore bonds with a total principal value of 99.4 billion yuan ($14.12 billion) in the first 11 months of this year, Fitch said.

A state-owned enterprise (SOE) in China’s northern province of Inner Mongolia became the latest issuer to default over the weekend after it missed payments on part of a 1 billion yuan privately issued bond.

Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong