With China's shadow banking system's collateral chain's collapsing amid government crackdowns on the ponzi, the 'desperate for liquidity' borrowers have increasingly turned to global capital markets' suckers to fund the next malinvestment. As China's currency becomes more internationalized and yields around the world collapse (thanks to central bank largesse), demand from investors has driven, for the first time ever, the Chinese corporate bond market has overtaken the United States as the world's biggest. As S&P warns, this is raising global credit risk as "as much as 10% of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," or around $4-$5 trillion, "causing overall corporate risk to increase globally," and it's not expected to slow anytime soon.
The Chinese corporate bond market has overtaken the United States as the world's biggest and is set to soak up a third of global company debt needs over the next five years, according to rating agency Standard & Poor's, underscoring the growing risk China's debt market is imposing on the global financial system.
Chinese corporate borrowers owed $14.2 trillion at the end of 2013 versus $13.1 trillion owed by U.S. corporations with the switch in rankings taking place a year earlier than it had expected, S&P said on Monday.
But that is not good news for the world's investors...
China, the world's second-largest economy is currently financing a quarter to a third of its corporate debt through its shadow banking sector and this had global implications, S&P said.
"This means that as much as 10 percent of global corporate debt is exposed to the risk of a contraction in China's informal banking sector," the agency said, estimating this at $4 trillion to $5 trillion. "With China's economy likely to grow at a nominal 10 percent per year over the next five years, this amount can only increase."
"As the world's second-largest national economy, any significant reverse for China's corporate sector could quickly spread to other countries."
As S&P sums up...
Cash flows and leverage at Chinese corporations are the worst among global peers, having deteriorated from being the best in 2009.
China's large and still-expanding contribution to global corporate debt, the higher financial risk is causing overall corporate risk to increase globally," the agency said.
It appears the authorities are starting to catch on (via SSE):
- *SHANGHAI EXCHANGE TO LIMIT INDIVIDUALS' PURCHASE OF RISKY BONDS
- *SHANGHAI EXCHANGE TO START RISK ALERTING SYSTEM FOR CORP. BONDS
As Bloomberg reports,
Shanghai stock exchange will alert about risks for its listed corporate bonds if the issuer’s solvency is “severely affected” by violations or govt investigations, according to a statement on the exchange’s microblog.
A risk alert will be issued when:
- Bond rating hits AA- or falls below AA-
- Issuer forecasts second straight year of loss
- Issuer’s solvency is “severely affected” by changes in operations
- Individuals with less than 5m yuan of assets are banned from buying bonds with risk alerts
Coming to a gated US bond fund market near you soon...forcing the purchase of entirely unrisky stocks (since real estate speculation has already had its wings clipped)
Nothing to see here, move along (as we noted previously, the scale of China's credit expansion dwarfs the Fed's QE)
And if we had to show it in one chart, it would be the following comparison of total Chinese and US bank assets: the two lines shown below are on the same axis, and at the end of 2009, the US had just a fraction more assets than China.
Another way of showing just the past three years:
Since then the US has added $2.3 trillion in bank assets, exclusively thanks to the Fed's reserve creation. As for China... total bank assets more than doubled from $11.5 trillion to a record $25 trillion! This is a number that is nearly double that of the US, and represents a pace of $3.5 trillion per year - or nearly four concurrent QEs - a rate of "financial asset" addition five times greater than in the US!
We are sure any contraction in that flow that is not subsidized by the bubble blown in corporate credit issuance or shadow-bank CCFDs will land as softly as a Ghanaian strikers' leg on Dempsey's nose.