Bond traders in China are rethinking counterparty risks as shock waves from a government takeover of a bank ripple through the country’s financial markets, Bloomberg News reported. It’s now getting harder for corporate bonds to be accepted as collateral for repo financing as lenders increasingly demand top quality bonds such as Chinese sovereign bills and policy bank notes as pledges. Traders are having second thoughts on taking even AAA rated short-term bank debt as security in the wake of last month’s seizure of Baoshang Bank Co.
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They have billions of dollars in funding, backing from China’s biggest tech companies and the world’s largest electric vehicle market at their doorstep. But Chinese EV start-ups face a struggle to survive in the face of intensifying competition and subsidy cuts, the Financial Times reported. Although analysts are reluctant to name companies that could disappear, the two dozen Chinese EV start-ups such as Nio and Xpeng, which have raised more than $10bn in recent years, are expected to be cut down to a handful.
Auto sales in China declined for an 11th straight month in May, with the slump in demand showing no sign of easing and the country’s automotive industry bracing for losses tied to new emissions standards, The Wall Street Journal reported. Sales for the latest month fell 16% from a year earlier, to 1.91 million vehicles. New vehicle emission standards are set take effect July 1, and dealers are scrambling to sell their older vehicles before they are disallowed at the end of June, often by offering steep discounts.
In China, debt takes many shapes – on the books, off the books, or buried deep within the financial system. Now, debt can even be considered equity, Reuters reported. In a bid to boost the economy, China this week announced it would allow local governments to borrow more to fund infrastructure investment. As part of this push, it will let municipalities use the proceeds of special-purpose bonds as equity in railroad, highway and other projects. 2 Previously, local governments weren't able to use such debt as seed capital. Using debt proceeds to fund equity is a dangerous proposition.
Chinese debt is a potential billion-dollar market for international credit-rating companies. It’s also one riven with pitfalls. The world’s third-largest debt market can no longer be ignored. Chinese companies sold more than $1.4 trillion of bonds last year, more than was raised by their U.S. counterparts. Eager to attract more foreign investors, the government in January allowed the Beijing-based unit of S&P Global Ratings to offer corporate ratings services, a Bloomberg View reported.
In 2008, as the Lehman Brothers bankruptcy triggered an epic credit crisis across the developed world, everyone braced for the inevitable crisis in the emerging markets that would follow. It didn’t happen. That year’s financial chaos created problems for these economies, whose stock and bond markets dipped far more than those of the U.S. or Europe; but they avoided wholesale defaults or devaluations, Bloomberg News reported. There was no repeat of the cycle of emerging market crises that had roiled the world in past decades.
Underwriters of a new Chinese credit hedging tool just narrowly avoided their first-ever payout in the nation’s $13 trillion bond market, Bloomberg News reported. An investor protection clause on two of Beijing Orient Landscape & Environment Co.’s bonds was triggered last month after the note repayment funds were used for other purposes. Bondholders recently gave waivers, not calling them defaults. The close shave is making underwriters more wary of selling credit risk mitigation warrants (CRMWs), according to Southwest Securities Co.
The governor of China’s central bank sought to ease concerns on Thursday over the growing level of risk at troubled small banks in the country, following the first state takeover of a lender in 18 years, the Financial Times reported. Yi Gang of the People’s Bank of China, speaking at an event in Beijing, said the central bank was “fully capable” of managing risks at small banks, and that it planned to increase the supply of credit to small companies, according to local media and Bloomberg.
When Baoshang Bank published its most recent annual financial statement in mid-2017, it claimed to have a non-performing loan ratio of just 1.68 per cent. Two years later, Baoshang, which has Rmb576bn ($83bn) in assets, has been taken over by the government because of its “serious credit risk”, the first such move in 18 years and a reminder of the hidden perils lurking within China’s financial system, the Financial Times reported. The need for a state rescue has raised questions about financial contagion.
Is it the start of a new era for China’s $42 trillion financial industry, or a one-time shock that will be quickly forgotten? Five days after the first government seizure of a Chinese bank in 20 years, investors are still grasping for answers, Bloomberg News reported. The takeover of Baoshang Bank Co. -- announced with scant explanation on Friday night -- left China watchers guessing at whether it marks an end to the implicit backstop for banks that has served as a linchpin of the country’s financial stability for decades.