Zero Hedge
0
All posts from Zero Hedge
Zero Hedge in Zero Hedge,

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

Don't look at their corporate bonds...

 

As Bloomberg details, as 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, according to data from the Chinamoney website.

 

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."

We leave it to Commerzbank's Zhou to conclude...

"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."