To Problems With China’s Financial System, Add the Bond Market

21chinabond

SHANGHAI — Keith Bradsher Chinese officials cheered on the country’s stock market when it reached heady new highs, offering hope that it could become a new source of money to fix China’s economic problems. Then, last year, the market crashed.

“China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further.”

Now another fast-growing part of China’s vast and increasingly complicated financial market is showing signs of distress: its $9 trillion bond market.

Prices for government and corporate bonds have tumbled over the past week, a sell-off that continued on Tuesday. The situation has spooked investors, prompting the government to temporarily restrain some trading and to make emergency loans to struggling financial institutions.

“The adjustment has not yet finished. It will continue and normalize until money is put where the government can see it.”

— Miao Zuoxing, a partner at the FXM Brothers Fund

The price drops have resulted in higher borrowing costs at a time when more Chinese companies need the money to cope with slowing economic growth. Yields reached new highs again on Tuesday.

In part, China is reacting to financial shifts across the globe. With the Federal Reserve raising short-term interest rates and many expecting the presidency of Donald J. Trump to lead to heavier government spending, investors worldwide are selling bonds.

“Due to recent, relatively large market fluctuations, our company decided to cancel the issue of the current bond, and will reissue it at a chosen time.”

— Jiangsu Sumec Group

But China is struggling with its own balancing act. The Chinese bond slump also stems from Beijing’s efforts to wring excess money from its financial system and to stop potential bubbles that may lurk in shadowy, hard-to-track corners of its economy. Should it continue with those efforts, bonds could fall further.

“The adjustment has not yet finished,” said Miao Zuoxing, a partner at the FXM Brothers Fund, a Shanghai-based investment fund that trades stocks, bonds and futures. “It will continue and normalize until money is put where the government can see it.”

At least 40 companies have said they would postpone or cancel bond offerings rather than risk being forced to pay high interest rates to sell the bonds — or being unable to sell them at all. Among them was the Jiangsu Sumec Group Corporation, an industrial trading house that exports items as varied as gardening tools and auto parts; the company said on Thursday that it would not go through with the sale of $130 million in short-term bonds.

“Due to recent, relatively large market fluctuations, our company decided to cancel the issue of the current bond,” Jiangsu Sumec Group said in a statement, “and will reissue it at a chosen time.”

China has particular reason to worry. As the world’s second-largest economy, after the United States, it relies on a rickety financial system that is mired in debt and susceptible to hidden stresses. Higher overseas interest rates could also prompt more Chinese investors to move their money out of the country, either to chase higher returns elsewhere or to avoid what some see as China’s growing problems.

The outflows are “adding to domestic banking system stresses and weakening the already fragile foundations of the entire financial system,” said Eswar S. Prasad, a professor of trade policy at Cornell University who was formerly chief of the China division at the International Monetary Fund.

A healthy bond market is crucial to China’s restructuring plans. The country has been counting on its fast-growing bond market as one way to bring market discipline to its traditionally state-directed — and wasteful — economy.

In the mature financial system of the United States, businesses have plenty of ways to get money. They can borrow from a bank, raise money selling stocks or bonds, or seek funds directly from any number of investors.

But in China, state-run banks are by far the main source of funding…(read more)

Source: New York Times



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