China's central bank says bond defaults could strengthen market

SHANGHAI: China's central bank believes that bond defaults could serve to weed out weakness and ultimately strengthen the market, it said on Friday amid growing investor concern over China's stance on corporate debt.

The statement follows a recent series of defaults by top-rated state-owned enterprises (SOEs) that sent shockwaves through China's corporate bond market.

"Bond defaults break the rule of the guaranteed payment of interest and principal and actually help form a mechanism based on survival of the fittest," Chen Yulu, a deputy governor at the People's Bank of China (PBOC), told a State Council news briefing on perfecting the country's social credit system.

"So far this year, the bond market has been stable overall, with a very few defaults causing fluctuations in the market. For now, the market has restored stability and investors rationality."

The central bank had said on Thursday that it would step up regulation of the bond market and Chen said in Friday's briefing that China must be vigilant against false information disclosure or "evasion of debts" by companies that default on bonds.

"Next, PBOC will join hands with other departments, including the China Securities Regulatory Commission, to clamp down on illegal activities in the bond market, strengthen information disclosure requirements and improve the credit rating system," Chen said.