Coronavirus further pushes private firms deeper in the mire

• Virus fear is sending global treasury yields even lower. From the US to China, laxer monetary policies and weaker risk appetite from investors are further supporting the bond rally. But the other side of the coin is whether the epidemic will impact bond issuance and heighten liquidity and refinancing risks. Such uncertainties may hit China more than the others as it is at the core of the outbreak with a funding structure relying on short-term debt with lower repayment ability comparing to global peers. Therefore, we examine the onshore bond market to evaluate the impact of coronavirus on the ability of Chinese firms’ to issue.
• From an aggregate level, net onshore bond issuance so far in 2020 is in line with the past average. The steady pace of net issuance could be a result of supportive monetary policies by injecting liquidity and cutting rates. Although the overall condition looks stable, there is a strong market preference towards issuances by financial institutions and public firms, which outpace the past average and become a strong signal for policy support. But private firms are clearly crowded out with the 10th consecutive months in negative net bond issuance since May 2019.
• Although the aggregate onshore bond yield fell from 4.21% in December 2019 to 3.9% in February 2020, a major trend is the vast perception of risk on ownership but not onshore credit rating. The risks do not seem to matter in terms of pricing risk (spreads between AA+ and AAA). Indeed, the difference between public and private firms has widened since June 2019 and further accelerated after the coronavirus outbreak, increasing from 167 bps in December 2019 to 178 bps in February 2020. The widened ownership spreads suggest investors’ view on private firms has not improved under current policies.
• Down the road, finding a way to untie the knot on private firms is essential to support the Chinese economy. The key reason for the weak bond issuance by private firms is the poorer financial health with a lower repayment ability and quicker deterioration of income growth comparing to state-owned enterprises. Together with the high leverage, onshore first-time bond defaulters have climbed further in 2019, raising concern in the market on higher credit risks. Without an improvement in market sentiment, the liquidity on private firms will remain limited, pointing to the need for the PBoC to take additional measures. The phantom of quantitative easing in China might be back soon, so as the world.

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