{"id":28236,"date":"2017-11-23T19:45:00","date_gmt":"2017-11-24T00:45:00","guid":{"rendered":"http:\/\/olduvai.ca\/?p=28236"},"modified":"2017-11-23T19:45:00","modified_gmt":"2017-11-24T00:45:00","slug":"china-deleveraging-hits-corporate-bonds-as-cascade-effect-begins","status":"publish","type":"post","link":"https:\/\/olduvai.ca\/?p=28236","title":{"rendered":"China Deleveraging Hits Corporate Bonds As Cascade Effect Begins"},"content":{"rendered":"

China Deleveraging Hits Corporate Bonds As Cascade Effect Begins<\/a><\/h3>\n
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Following the market lockdown during October\u2019s Party Congress, many commentators were disturbed by the continued rise in Chinese government bond yields as we returned to \u201cbusiness as usual\u201d, with the 10-year rising to 4%. <\/strong>At the beginning of this month, we discussed the sell-off (see \u201cChina: Shadow Bank Inflows Are Critical To Sustain The Ponzi\u2026But They\u2019re Falling\u201d<\/a>) and noted a useful insight from the Wall Street Journal.<\/p>\n

An important anomaly to note about the bond rout: as government bonds sold off, yields on less-liquid, unsecured Chinese corporate bonds barely moved.<\/strong><\/p>\n

That is atypical in an environment of rising rates – usually, bond investors shed their less-liquid holdings and hold on to assets that are more easily tradable, like government debt.<\/p><\/blockquote>\n

The question was\u2026why had corporate bond yields barely moved? <\/strong>The answer, according to the WSJ, was that China\u2019s deleveraging policy led to redemptions in the shadow banking sector, e.g. in the notorious $4 trillion Wealth Management Products (WMP) sector. Faced with redemptions, shadow banks had to sell something\u2026quickly\u2026and highly liquid government bonds were the \u201ceasiest option\u201d. Furthermore\u2026and this is potentially significant\u2026the WSJ noted.<\/p>\n

Meanwhile, the nonbanks have held on to their higher-yielding corporate bonds, which at least have the benefit of helping them to maintain high returns.<\/strong><\/p><\/blockquote>\n

Not any more (see below).<\/em><\/p>\n

We agreed with the WSJ\u2019s explanation at the time, but noted that the government bond sell-off was actually a sign of the unravelling of the WMP Ponzi scheme. <\/strong>The Chinese authorities are wise to the Ponzi which is why they announced the overhaul of shadow banking and WMPs last Friday (see \u201cA \u2018New Era\u2019 In Chinese Regulation Means Turmoil For $15 Trillion In China’s \u2018Shadows”<\/a>). However, the new regulations don\u2019t kick in until mid-2019, a sign to us that when they looked \u201cunder the bonnet\u201d, they didn\u2019t like what they saw.<\/p>\n

…click on the above link to read the rest of the article…<\/p>\n<\/div>\n<\/section>\n","protected":false},"excerpt":{"rendered":"

China Deleveraging Hits Corporate Bonds As Cascade Effect Begins Following the market lockdown during October\u2019s Party Congress, many commentators were disturbed by the continued rise in Chinese government bond yields as we returned to \u201cbusiness as usual\u201d, with the 10-year rising to 4%. At the beginning of this month, we discussed the sell-off (see \u201cChina: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[2],"tags":[130,3954,2027,15318,15317,6428,4318],"class_list":["post-28236","post","type-post","status-publish","format-standard","hentry","category-economics","tag-china","tag-corporate-bonds","tag-deleveraging","tag-wealth-management-products","tag-wmps","tag-wsj","tag-zerohedge"],"_links":{"self":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/28236","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=28236"}],"version-history":[{"count":1,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/28236\/revisions"}],"predecessor-version":[{"id":28237,"href":"https:\/\/olduvai.ca\/index.php?rest_route=\/wp\/v2\/posts\/28236\/revisions\/28237"}],"wp:attachment":[{"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=28236"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=28236"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/olduvai.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=28236"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}