Friday, October 16, 2015

China's Corporate Bonds.......ANOTHER PESKY FACT!

China's Corporate Bonds

If You Thought China's Equity Bubble Was Scary...

The rout in Chinese stocks this year erased $5 trillion of value, investors fled for safety in the nation's red-hot corporate bond market. They may have just moved from one bubble to another.

The risk of a downward spiral in debt prices has increased after investors took on leverage to amplify their returns, according to Ping An Securities Co. The monthly volume of bond repurchase agreements -- a form of borrowing used by investors to increase their buying power -- has jumped 83 percent from January to 39 trillion yuan in September.

Furthermore, Commerzbank AG puts the chance of a crash by year-end at 20 percent, up from almost zero in June. Industrial Securities Co. and Huachuang Securities Co. are warning of an unsustainable rally after bond prices climbed to six-year highs and issuance jumped to a record. The boom contrasts with caution elsewhere. A selloff in global corporate notes has pushed yields to a 21-month high, and credit-derivatives traders are demanding near the most in two years to insure against losses on Chinese government securities.

A reversal in the bond market would do more damage to China's economy than the drop in shares and exacerbate capital flight from the biggest emerging market,according to a worst-case scenario projected by Banco Bilbao Vizcaya Argentaria SA. The Spanish lender more than doubled its first-quarter profit by selling holdings in a Chinese bank.

"The equity rout merely reflects worries about China's economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid," said Xia Le, the chief economist for Asia at Banco Bilbao. "A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets."

"Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash... This game can't go on forever."


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