China’s bond market is facing rising re-defaults, driven by continued stress in the housing market, where years of government loosening and stimulus have yet to bring relief, according to a report by S&P Global Ratings on May 11.

Since 2020, amid the crisis triggered by the default of China Evergrande Group — the world’s most indebted property developer — about 40% of restructured onshore bonds have suffered re-defaults, the report said. The turmoil was later compounded by Country Garden’s default two years later and China Vanke’s two years after that.

Despite stimulus, corporate loans have declined for three years, and household loans for six years. Government bond issuance has increased, but much of it has been used for debt swaps rather than new credit expansion.

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“China’s housing market has seen three major downturns during this crisis. Two have led to a spike in re-defaults. The third one, currently in the making, may lead to the same in 2027,” said Charles Chang, Greater China country lead for corporates at S&P Global Ratings. “The ongoing crisis left in place systemic risk concerns that are being exacerbated by the Iran conflict.”

Lulu Shi, director of Asia-Pacific corporate ratings at Fitch Ratings, said debt extensions or exchanges may ease liquidity pressure but would not address the developers’ fundamental challenges, including unsustainable financial structures, weak cash flows from subdued sales, and eroded confidence among homebuyers and financial institutions.

“Without improvement in these fundamentals, a re-default is almost inevitable,” Shi said. While such setbacks could further erode confidence, Shi said their impact on the homebuilding sector would likely be less severe than in earlier phases of the crisis.

“In our view, homebuyer confidence now appears less tied to developers’ financial health and more constrained by structural headwinds, including slow income growth and high household leverage,” Shi said.

Government directives against outright defaults have helped reduce new defaults this year, with both onshore and offshore default rates dropping to zero so far this year.

Offshore corporate bonds due would fall to US$71.1 billion ($90.3 billion) this year and US$56.8 billion in 2027, the S&P report said. Property sector maturities would nearly halve from US$22 billion in the same period. Onshore bonds due for firms would rise 16% this year to RMB7.2 trillion ($1.35 trillion) before falling to RMB5.6 trillion in 2027, the S&P report said.

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Chang warned that declining default rates would further challenge credit differentiation in China’s bond market, as yields compress across the spectrum. “Without the corrective triggers of defaults, it will be even harder for the market to differentiate and price risk, and to allocate credit efficiently,” he said.

Over the past five years, the property sector has recorded far more defaults and debt rollovers than any other industry. Last year, it accounted for 75 defaulted or extended credit bonds worth RMB78.3 billion, or 66.5% of the total, according to a recent report from Huayuan Securities.

Defaults were concentrated in economically developed regions, with Guangdong province, Beijing, Shanghai, Fujian and Hubei provinces among the top five, the report said.

“While property credit bond defaults have fallen annually since 2022, the sector still faced broad systemic risks last year,” said Liao Zhiming, fixed income chief analyst at Huayuan Securities, in the report. “Major developers like China Vanke, and mid-tier developers such as Sino-Ocean Group, China Aoyuan Group and Logan Group, remained under stress.”

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