Bond Selloff Shows Risks of China’s Efforts to Restrain Credit
the yuan, has fallen to its lowest level against the U.S. dollar since 2008 as more Chinese move their wealth out of the country despite strict capital controls.
.. China’s total debt surged to around $27 trillion this year, or 260% of gross domestic product, compared with 154% in 2008 at the start of a stimulus program to offset the financial crisis. It is continuing to grow at more than twice the pace of the economy.
.. Last week, some bondholders, including asset managers and issuers of “wealth management products”—off-balance-sheet investment vehicles used by banks and other institutions to get around regulatory limits on lending—were likely squeezed too much. As a result, they began dumping government bonds—which are liquid and thus easy to sell—to raise cash, analysts say.
.. The selloff sent China’s benchmark 10-year government bond yield to 3.33%
.. The 10-year bond yield had hit a 14-year low of 2.66% as recently as October.
.. Last week’s sharp price drop has raised concerns that a larger bond rout may be in the offing
.. Many economists say China’s debt scale up may result in a crash similar to the 2008 mortgage crisis in the U.S., or a long slowdown such as Japan’s after its 1980s property bubble burst—or both.
.. The clearest sign that many Chinese are worried is the amount of money flowing out of China despite strict measures to stop it. China’s foreign reserves have dropped by 21% to $3.05 trillion in the past two years.
.. A key question now is how much of China’s bond market is owned outright, and how much was bought with money borrowed under murkier circumstances such as shadow finance, raising risks. Analysts estimate leverage in the system overall is between 1.2- and 5-times assets, a relatively low figure, although in pockets of the market it can go much higher.
.. But since much of the financial system is lightly regulated, the true amount of leverage in the system is unknown.
.. Economists say China’s central bank has the firepower to keep its debt markets from plunging by injecting more money into the system if necessary.