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Affected by refinancing pressures, slow growth in the industrial sector, and the impact of investor sentiment on China-US trade disputes, Fitch Ratings believes that the scale of Chinese corporate defaults (measured by the number of issuers and bond principal) may reach a new high this year.

The number of defaulted issuers in China last year was 45, and the principal amount of default bonds was 110.5 billion yuan (the same below). In the first four months of this year, 22 companies (both private companies) defaulted, involving a total bond principal of 31 billion yuan, while the number of defaulting companies in the first four months of 2018 was only 5, involving bond principals. The total amount is 9.6 billion yuan. However, the scale of default in the first four months of 2019 is still lower than the second half of 2018.

Fitch believes that the credit cycle may pick up in the coming months, but the improvement will be small. It is expected that large-scale credit easing will not occur in the short term.

Expect short-term credit growth will not continue to accelerate significantly

As of the end of April this year, the scale of outstanding credit of Chinese enterprises increased by 7.2% year-on-year (measured by the amount of social financing scale minus equity financing and non-enterprise sector debt), and by the end of 2018, the indicator was at a historical low of 6.4%. However, Fitch expects that credit growth will not continue to accelerate significantly in the short term, as the Chinese banks in the short to medium term lack sufficient capital to support the loan growth. In addition, the government is currently using fiscal instruments to support economic growth while maintaining a stable RMB exchange rate and moderate inflation, rather than implementing a loose monetary policy.

Since the middle of 2018, the credit spread of Chinese corporate bonds has remained stable. Fitch expects this trend to continue until the end of 2019. The expectation of an increase in the scale of default has been largely reflected. In addition, the liquidity of the bond market has improved.

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