China

China’s brokers and banks account for more than half the exposure to loans backed by company shares, a key source of risk as the country’s stock market keeps sliding, Bloomberg News reported. About 4.45 trillion yuan ($640 billion) of shares were pledged as collateral in China’s $5.4 trillion equity market as of Oct. 18, according to Chengdu-based research firm PY Standard. Banks and securities firms have extended more than half of that debt. If stock values continue falling, lenders may be forced to offload more shares, perpetuating a vicious spiral.

The funding squeeze for China’s private enterprise is expected to persist, despite recent measures aimed at easing financing difficulties, adding further pressure on the beleaguered stock market, Bloomberg News reported. Non-state companies have borne the burden of the government’s two-year deleveraging campaign, as the closing down of funding channels boosted the cost of borrowing and sent defaults to a record high.

Corporate debt investors navigating an expanding minefield of bond delinquencies in China are reaching for a hedging tool similar to credit-default swaps that was last used more than two years ago, Bloomberg News reported. Since September, China Bond Insurance Co. and Bank of Hangzhou Co. have sold four instruments called credit risk mitigation warrants, which insure creditors against defaults of the underlying debt. These risk hedging instruments are set to become increasingly popular as bond failures pile up, according to Golden Credit Rating International Co.

Beijing is trying to kick its habit of using big-ticket infrastructure spending to fuel the economy, a turning point from a growth model that has left many Chinese cities adorned with empty high-rises and underused highways, The Wall Street Journal reported. China bolstered economic growth for decades by pouring trillions of dollars into roads, factories, railroads and more, and doubled down to protect the economy from the global financial crisis of the last decade. Now the torrent has subsided as debt soared and needless projects blossomed.

China’s gummed-up credit system is threatening economic growth and officials may have little choice but to let unregulated lenders step in, the New York Times DealBook blog reported. The nation’s economy is not in desperate straits yet, but confidence appears shaken. The economy expanded 6.5 percent in the third quarter of 2018, missing expectations.

Beijing is keen to show results after four rounds of policy easing, so China’s big banks are playing along, highlighting their efforts to boost lending to cash-starved small firms, offering collateral waivers and setting loan targets. But in reality, banks’ loan eligibility requirements for small and medium-sized enterprises (SMEs) remain stringent, making it too difficult or too expensive for them to borrow, according to bankers and company executives, Reuters reported. That has forced some small firms, including exporters, to simply give up on borrowing and put investment plans on hold.

China’s local governments may have accumulated 40 trillion yuan ($5.8 trillion) of off-balance sheet debt, or even more, suggesting further defaults are in store, according to S&P Global Ratings. “The potential amount of debt is an iceberg with titanic credit risks,” S&P credit analysts led by Gloria Lu wrote in a report Tuesday. Much of the build-up relates to local government financing vehicles, which don’t necessarily have the full financial backing of local governments themselves, Bloomberg News reported.

China’s peer-to-peer lenders expect their numbers to collapse from more than 1,500 to as few as 50 over the next 12 months, as regulators push through tough reforms while also barring company executives from fleeing the country. Peer-to-peer lending, the business of connecting private lenders with borrowers online, is a $120bn industry in China and traditionally has been lightly regulated with a high risk and return profile, the Financial Times reported.