Are Inverted Chinese Corporate Curves A Harbinger Of A "Hard-Landing" Recession?
Following in the footsteps of the recent fireworks of the Chinese SHIBOR market courtesy of the evaporation of virtually all interbank liquidity, we now get more indications that all is fine... no inverted... no fine in China. Per Bloomberg, Chinese corporate spreads have now inverted to a level not seen since pre-Lehman days: "The average yield on yuan corporate debt maturing after 2025 was 4.67
percent in December, compared with 4.97 percent for three to five-year
bonds, according to Bank of America Merrill Lynch’s China credit
indexes. The last time the gap was wider was on Aug. 13, 2008, when the
spread reached 31 basis points, or 0.31 percentage point." And while corporate bond issuance in China, especially on the longer end, is still very scarce (and a reason why China still does not have a representative CDS market, something that JPM will fix promptly), this should be an indication that either things are very good or starting to get rather bad, as more are "rushing" to the safety of near-term fixed income on concerns of what may happen to the long end in the next few months.
Bloomberg attempts to spin this very concerning development in a favorable way:
"There isn’t much supply of long-term paper in the corporate bond market, which is still very much in its infancy,” said Donald Straszheim, head of China research at International Strategy & Investment Group in Los Angeles. “If you believe that China is not going to allow inflation to get out of control, then long-dated paper makes a lot of sense.”
Policy makers twice raised interest rates last year and increased the proportion of deposits that lenders must set aside as reserves six times as part of wider measures to curb inflation and asset bubbles. Consumer prices rose 5.1 percent in November from a year earlier, driven by food, according to a statistics bureau report Dec. 11.
“As the view develops inflation is not going to get out of hand, that will also tend to bring short-rates down,” Straszheim said. “You’ll see the curve move back to a more normal slope.”
“Most bonds being sold are in the three to five-year range, not in the 10-year-plus zone,” Jeremy Amias, co-founder of fixed-income brokerage and advisory firm, Amias Berman & Co., said from Hong Kong. There hasn’t been the same shift in borrowing costs affecting government bonds because of the “relative lack of supply” of corporate debt with longer maturities, he said.
That's all good in a hypothetical situation. The problem in practice is that as with every inverted curve situation, there is a mismatch of liquidity, and an inverted curve everywhere in the world, and we believe even Rich Bernstein will agree with this, is the best advance indicator of an upcoming recession, as Bernstein so adamantly tried to convince Rick Santelli the other day.
And just to confirm that this could be the first shot across the bow, we now read in the NYT that the world's largest IPO in history, that of Chinese Agribank, as well as China Minsheng Bank, are rushing to add more capital:
Two Chinese banks said Friday that they would need to raise funds to meet new capital, as the lenders look to buffer their balance sheets against risk.
Agricultural Bank of China, which made its huge debut on public markets last July, said that its board had approved issuing 50 billion renminbi ($7.5 billion) worth of bonds over the next two years “to increase the supplementary capital and capital adequacy ratio.”
And China Minsheng Bank, the communist nation’s first nonstate commercial bank, said it would make a private placement of 4.7 billion A shares worth 4.57 yuan each in a sale worth 21.5 billion yuan ($3.2 billion).
Minsheng said in a filing to the Hong Kong stock exchange, where it had suspended its shares before the announcement, that the proceeds from the issue would be used to shore up its capital adequacy ratio and risk cushion. It cited a need to meet “increasingly stringent regulatory requirements.”
While the Chinese capital markets continue to be shrouded in secrecy and mystery, one thing we can be certain of: inverted curves, coupled with persistent capital deficiency, and threat of runaway inflation, has never resulted in anything good. And should the Chinese balancing act fail, watch out non-decoupled world (that would be everyone).
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