World News – US – The debt bomb ticking over China’s $ 15 trillion bond market

While defaults in the Chinese bond market were once considered rare – many borrowers depended on financial assistance or bailout troubles – 2018 and 2019 saw record arrears. The outages subsided for much of 2020 as policymakers tried to limit the economic damage from the coronavirus outbreak before picking up again in November.

After years of debt-driven spending, Chinese companies are under increasing pressure. They are trying to cope with unsustainable debt levels and crackdown on unregulated credit, also known as shadow banking, all against the backdrop of much slower economic growth compared to previous decades. Beijing has tried to establish a more market-driven approach to risk that will allow competition to weed out weaker borrowers and so-called « zombie » firms.

After Beijing withdrew some of its supportive measures to offset the effects of the pandemic, signs of credit stress are returning. A series of mistakes by government affiliates has sent shock waves through the market, raising doubts about the credit risks of a group of borrowers historically believed to enjoy the implicit guarantee of the state or local governments.

There are signs that Beijing is getting comfortable with defaulting borrowers. This might put investors off in the short term, but is ultimately a good thing for the market in the long run, as it can cause weaker companies to fail. Encouraging competition and allowing investors to more accurately assess price risk will help improve the efficiency of the country’s debt markets.

Still, there can be some nasty surprises for investors, with the default values ​​appearing to come out of nowhere. This is not supported by China’s local rating firms, which have given the vast majority of yuan debt a top AAA rating and even been accused of stubborn behavior. Local knowledge is becoming increasingly important, especially as more and more international bondholders are embroiled in the country’s dire bankruptcy proceedings.

Bond, China, Bond Market, Investor, Finance, Standard, South Korean Won, US Dollar