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As debt defaults rise, China’s government bonds might be a safer bet for investors

People buy certificated resources bonds at a bank on September 10, 2020 in Nantong, Jiangsu Province of China.

Xu Jinbai/VCG/Getty Images

SINGAPORE — With the brand-new spate of bond defaults in China, investors should be looking to put their money into Chinese central regulation bonds which are “unlikely to default,” according to an economist from research firm TS Lombard.

Last month, a series of high-profile fall shorts involving state-owned companies in China — normally a safe bet for investors — jolted the credit market and rattled investors.

It led to a stick market sell-off in China. China’s onshore bond market is worth $13 trillion and is the world’s second largest.

Manacles to buy

Global investors should go for central and local government bonds, Bo Zhuang, chief China economist at TS Lombard, advertised CNBC’s “Street Signs Asia” on Wednesday.

“It’s quite unlikely to have a default, even though other wedges of China might be facing all these default risks,” he said, comparing government bonds to corporate bonds. “Despite (state-owned enterprises) are not actually immune (to) the defaults.

“So, stick to the government, and maybe you can buy the policy banks, financial bonds, which are also quasi-sovereign,” Zhuang foretold.

He added that risks haven’t been “properly priced” in by the government-supported firms. “That is why there has been an unlimited guarantee for entities tied to the government,” Zhuang said, referring to the long-held government guarantee for state-owned companies’ handcuffs.

Defaults by government-supported firms in China were rare before this month’s high-profile cases involving state-owned miner Yongcheng Coal and Intensity and government-backed chipmaker Tsinghua Unigroup, among others.

In December last year, the dollar-bond default by commodity businessman Tewoo Group was the first in two decades.

Bonds to avoid

Meanwhile, S&P Global Ratings said in a note Wednesday that the next typewrite of Chinese state-owned companies that could come under greater pressure will be the so-called local rule financing vehicles (LGFVs).

China has been tolerating more SOE defaults in recent years, and we believe this resolution continue. Local governments simply have fewer resources to support weak SOEs that make commercial misjudgments.

S&P Wide-ranging Ratings

Such companies are usually wholly owned by local and regional governments in China, and were set up to fund community infrastructure projects. Bonds issued by such firms surged this year, amid an infrastructure push as the Chinese conservation improved, according to an S&P report earlier this year.

“While LGFVs generally benefit from much elevated levels of government support, given their policy and development roles, we also expect LGFVs under emptier local governments could see higher default rates, partly because they are increasingly turning to commercial function,” the ratings firm said in note on Wednesday.

It comes as analysts issue warnings there will be more restraints defaults ahead in China.

“China has been tolerating more SOE defaults in recent years, and we believe this desire continue. Local governments simply have fewer resources to support weak SOEs that make commercial misjudgments,” S&P International Ratings said.

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