By Andrew Moran *
China was one of the first major countries to recover from the coronavirus-induced economic collapse – but at what cost? The country has contracted huge public and private debts, eased monetary policy and issued billions of dollars in new bonds. Yet as the second tallest economy As it tries to return to its pre-crisis glory days, Beijing could potentially face a new pandemic that could have a drastic effect on domestic and foreign financial markets: a bond default crisis. Once again, when China sneezes, the world catches the cold.
The big flaw?
The Chinese bond market is at a pressure point with tightening liquidity levels. Although a massive sell-off has yet to take place in the world’s second-largest bond market, all indicators point to its inevitability. The authorities are desperate to implement more financial discipline and transparency in the debt area, but it may be too little, too late.
Chinese companies are defaulting on local bonds at the fastest rate on record. Since the start of the year, companies from airlines to real estate developers have failed to make payments on roughly $ 16 billion in domestic bonds. This is the fourth year in a row that defaults have surpassed the $ 15 billion mark, but they typically crossed that threshold in September, not April.
On the one hand, these flaws are part of a robust bond market because it highlights efficiency and transparency. On the other hand, the sources of these defaults are of great concern: the real estate sector accounted for around a quarter of all defaults.
In addition, defaults on offshore bonds are starting to increase, totaling nearly $ 4 billion in the first quarter. Are foreign investors, who are bailing out China, worried about this trend? So far, foreign investors have been attracted by the performance bonuses and the strengthening yuan. At the end of April, foreign holdings of government bonds exceeded $ 326 billion, after falling sharply in March. Foreigners can inject some liquidity into the bond market, but this reprieve can be short-lived.
The Li Keqiang Index, an alternative economic measure that examines electricity consumption, the volume of rail freight and bank loans, is at a decade high. The Chinese bond market is reportedly lagging behind these indicators, leading to higher rates in the short term. Producer prices are skyrocketing and they have shown a direct link to government bond yields, even more so than consumer prices. In addition, the short-term interest rate markets are noticing the trends, gradually moving upward, and suggesting that tighter liquidity conditions are on the horizon.
Policymakers to the rescue?
At the end of last year, Yongcheng Coal & Electricity Holding Group, a state-owned mining operator in Henan Province, did not issue any principal or interest payments on AAA-rated commercial paper. ‘worth nearly $ 152 million. This sets off panic selling and collapse in bond prices. This was a big problem for two reasons: the size of the state-owned company and the fact that it was another prominent company with direct links to the central government. In 2020, there were over 100 defaults on corporate bonds.
Now that the corporate bond default rate is on the rise again, will policymakers step in? For now, the answer may be no, as officials could have other headaches to worry about, including high asset prices and rising debt levels. Moreover, according to Jean-Charles Sambor, head of emerging market debt at BNP Paribas Asset Management, officials are trying to change the mindset of investors, telling Bloomberg:
Policymakers are prepared to draw a line in the sand between what is systemic and what is not. They want to inject more credit risk into the system and change the mindset of investors, forcing them to look more at stand-alone credit risk rather than speculating on the likelihood of central government support.
But what happens when flaws start to hit municipalities? Zunyi Bozhu District, a county in southwest China’s Guizhou Province, has failed to repay a bond with a principal amount of around $ 40 million. It was the first municipal bond default in China this year, and experts warn a few more could hit the $ 1.65 municipal bond market in the next 12 to 18 months.
Ultimately, the bond market is in disarray, and the only things that could keep it afloat are foreigners and bailouts.
China needs repairs after COVID
Across the country, gaping holes threaten to reverse the post-coronavirus recovery. Whether it’s credit risks or hidden debt problems, China’s titanic economy will need to point the nation in a new direction if it is to avoid crashing into multiple icebergs. It will be difficult for the officials, because they always try to cover up the distortions, the bailouts, zombies, and the crises of before the COVID-19 public health crisis. And President Xi Jinping Will Need More Than One de facto Communist five-year plan to accomplish this feat.
Source: originally published by Nation of freedom.