Third wave of bond default looms in China

China’s economy is edging closer to a potential third wave of bond defaults, on the back of sluggish economic growth, tight government policies and high financing costs, according to a report from S&P Global.

This scenario, expected as early as next year, would mark the third wave of corporate defaults in 10 years, signaling that the government’s current directives might be “creating distorted incentives in the economy,” Charles Chang, greater China country lead for corporates at S&P told {CNBC}.

“Policies aimed at reining in excessive leverage drove the two default waves so far. More policies with similar aims, scale, and effects may lead to the next wave of defaults,” Chang said in the report.

Too much interference in the market? China’s corporate bond default rate fell to 0.2% in 2023, the lowest in at least eight years and well below the 2.6% global rate, according to S&P data. “To a certain extent this is not a good sign, because we see this divergence as something that’s not the result of the functioning of markets,” Chang said.

“We’ve seen directives or guidance from the government in the past year to discourage defaults in the bond market.” But the future of the bond market in the country — once those directives end — remains uncertain, he added.

Stabilizing the real property sector is key, as it can “potentially ease off some of the negative wealth effects that we’ve been seeing since the middle of last year,” according to Chang.

Navigating the risks: The Chinese government should prioritize addressing the real estate market slump in a “comprehensive strategy,” that includes financial risk management, productivity growth and bolstering social safety nets to encourage consumer spending, according to Director of the Fiscal Affairs Department at the IMF, Vitot Gaspar.

THE MARKETS THIS MORNING-

Asian markets are down this morning following two straight days of rallies, with Japan’s Nikkei 225 falling 1.8% and South Korea’s Kospi slipping 1.12%. US futures also fell after Meta’s disappointing earnings forecast and ahead of the release of US GDP data later today.

THE CLOSING BELL-

The ADX fell 0.1% yesterday on turnover of AED 990.6 mn. The index is down 5.6% YTD.

In the green: Presight AI Holding (+4.8%), Bayanat (+4.1%) and Abu Dhabi National Company for Building Materials (+4.1%).

In the red: Rapco Investment (-9.2%), Palms Sports (-8.2%) and Al Seer Marine Supplies and Equipment (-2.8%).

Over on the DFM, the index stayed flat on turnover of AED 546.2 mn. Meanwhile, Nasdaq Dubai fell 0.2%.

CORPORATE ACTIONS-

E& has approved a new progressive dividend policy that will see it pay out dividends with an annual increase of 3 fils per share for the next three years, reaching a dividend per share of 89 fils by 2026, according to a bourse filing (pdf). The company paid out some AED 3.5 bn in dividends for 1H 2023, and will pay another AED 3.5 bn for 2H 2023 on 10 May.

Al Wathba National Ins. has approved a dividend payout of AED 51 mn for 2023,according to an ADX disclosure (pdf).

E7 Group has agreed on a 1:10 share split, according to an ADX disclosure (pdf). Each existing share, valued at AED 2.5, will now be split into ten shares, each valued at AED 0.25. The share capital of the company is AED 524 mn, constituting approximately 2 bn shares with a nominal value of AED 0.25 each.

Americana Restaurants International has approved a dividend payout of AED 661 mn for 2023, according to an ADX disclosure (pdf).