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Defaults in Asia set to rise with hot spots in China, India

Hong Kong

DEFAULTS across Asia may be headed even higher next year, with trouble seen especially in China and India.

Many investors expect fewer bailouts by the Chinese government after it recently let commodities trader Tewoo Group default in the biggest failure on a dollar bond by a state-owned firm in two decades. Companies in the region have been on a buying spree fuelled by debt. Those factors could make things even worse in 2020 after China onshore defaults rose to a record in 2019.

As some economies in Asia slow, companies are left vulnerable to any tightening in liquidity. A rise in defaults would likely further weigh on investor sentiment, and raise the cost of borrowing for the riskiest firms.

Defaults in China will likely rise in both the onshore and offshore bond markets next year amid a tightening in funding, and weaker state-owned firms and local government financing vehicles may be at risk, according to Monica Hsiao, chief investment officer at hedge fund Triada Capital. The nation's real estate firms, traditionally seen as the bulwark of the economy, could also be vulnerable.

"We should not assume that the China property sector is immune if conditions continue to tighten for small over-levered developers that do not have stakeholders with strong political ties, for example," said Ms Hsiao.

A wave of acquisitions has also prompted companies with overextended balance sheets to stumble. Shandong Ruyi Technology Group Co, which made a string of overseas purchases, including UK trench coat maker Aquascutum, has been struggling to repay debt. Singapore-headquartered MMI International Ltd, which was sold to a Chinese buyout group, has missed loan repayments.

In India, companies have defaulted on record amounts of local currency and international bonds as the shadow banking crisis has triggered a credit squeeze. While Essar Steel India Ltd's insolvency has been resolved with its takeover by ArcelorMittal, other companies have faced delays in the sale of assets under India's bankruptcy law.

"India is still struggling to deal with the mountain of debt that exists, and there haven't been yet that many success stories," said David Kidd, a partner at Linklaters who focuses on restructuring and insolvency matters.

In Southeast Asia, oil and gas companies are still reeling from depressed oil prices. There has been an "uptick" in defaults in Malaysia and a few companies have had to restructure debt with lenders, according to Mr Kidd.

Growing trade linkages between China and the rest of Asia also leave other regional economies vulnerable to the nation's weakening growth.

"The Chinese slowdown and the potential for defaults in China, perhaps that's also having a knock-on effect regionally," said Mr Kidd. BLOOMBERG