“A Big Wake Up Call”: Chinese Bond Market Roiled By First Ever Bank Failure
Late last Friday, we reported that several hours after the market close, China’s financial regulator and central bank made a shocking announcement: for the first time in nearly 30 year, China would take control of a bank, in this case the troubled inner Mongolia-based Baoshang Bank, due to the serious credit risks it poses.
The news which highlights the potential for increased stress at regional lenders that piled into off-book financing in recent years, was strategically timed to hit ahead of the weekend, and with the market closed, it avoided an immediate panic selling waterfall. However, the fact that in China banks are now fair game for failure, and will soon join the record surge in Chinese corporate defaults…
… slammed the country’s financial sector on Monday, sending funding costs sharply higher and underscoring the potential for increased stress at regional lenders that piled into off-book financing in recent years.
Unfortunately for Beijing, Bloomberg writes overnight that despite the strategically timed news, it wasn’t enough to prevent turmoil from sweep across the nation’s bond market, where funding costs for lenders surged and yields on government debt jumped. The seven-day repurchase rate jumped 30 basis points to 2.85%, the highest in a month, as of late Monday in Shanghai, while the yield on 10Y sovereign bonds climbed 5 bps to 3.35%.
“Baoshang’s case is a big wake-up call,” said Becky Liu, head of China macro strategy at Standard Chartered. “Participants in the interbank market, who didn’t differentiate credit when lending to banks on the belief that they will never go bankrupt, have now become more cautious. That has helped drive up funding costs and thus sovereign yields.”
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