China's debt market is once more in the eye of the storm. Rising leverage levels and easier monetary and credit conditions have not been effective in promoting economic growth. Many Chinese companies are struggling with heavy debt burdens，declining profitability and excess capacity amid a fragile world economy. Defaults have occurred with greater frequency and there is growing concern over corporate debt issues and banks’ non-performing loans.

Bond defaults will lead to higher risk premiums and diverging credit pictures -- a reflection of the allocation of resources through price signaling. But a stable and appropriate default rate will help eliminate inferior borrowers and give clarity to the market. This will also demonstrate that the market is maturing. It is important to break the "implicit guarantee" for domestic bonds and release risk in an orderly manner. Currently，China's debt issues，and even the bond market itself，are in a critical period - the third round of credit revaluation. Credit spreads are diverging as default totals rise. Moreover，this period of adjustment could be prolonged.

Three Rounds of Credit Revaluations

Over the past two decades，China's bond market has experienced three rounds of credit revaluations. The first was in 2008 when companies like Jiangxi Copper，Shandong Weiqiao，Aerosun and Linuo all had credit problems，causing credit spreads to increase significantly. Those companies managed to avoid default. The main reason for this initial round of credit revaluation was a chain reaction started by an external event -- the financial crisis in the US.