China may have to brace for a new wave of bond defaults, S&P says

China’s state-directed economy may be setting the stage for a new wave of bond defaults, according to an S&P Global Ratings report. This would be the third round of corporate defaults in about a decade. The low default rate in China contrasts with concerns about overall economic growth in the country. Last year, China’s corporate bond default rate fell to 0.2%, the lowest in at least 8 years. Experts are watching to see what happens when the government guidance to discourage bond defaults ends. The real estate market, which has been a major cause of defaults, is a key concern for the government. China’s debt problems are not as pressing as the need to address real estate issues and focus on innovation, productivity growth, and strengthening social safety nets. UBS has upgraded MSCI China stocks and its outlook on Hong Kong stocks due to better corporate earnings performance and signs of a pickup in consumption. The bank cited China companies’ positive surprises on dividends and buybacks and the higher visibility of shareholder returns. China’s underperformance in the stock market is attributed to valuation collapse rather than company fundamentals. The positive outlook on earnings and market reforms will be closely monitored.