The big trouble in massive China that we discussed here [5] is weighing heavily on the liquidity in the debt-fueled nation. As The FT reports [6], several banks have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt. "China is much more funding dependent than in the past," warns one analyst, as issuers are dealing with a string of problems stemming from the drying up of interbank market liquidity and fierce competition from wealth management and trust products for investors’ funds. "Government and policy banks have suffered the most. Now pressure is coming to corporates," one trader pointed out, adding, ominously, "it's going to end pretty ugly unless PBOC changes its attitude to liquidity;" which, of course, is exactly the situation the 3rd Plenum outline is looking to change.
Via The FT, [6]
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“Chinese 10-year Treasury bond yields are at a six-year high and are up about 100 basis points versus a year ago,” said one senior bond banker in Beijing. “CDB’s yields have widened by a bit more than 100 basis points and other corporate bonds are seeing yields rise by 150-200 basis points.”
The head of fixed income sales and trading at a European bank in Shanghai said the policy banks pre-disclose their issuance plans, so it is easy to see when they delay. “But for most corporations, they just quietly delay their issues and no one knows that except for the underwriter.”
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China is much more funding dependent than in the past – total social financing is set to hit a new record of Rmb18tn-Rmb19tn this year up from the Rmb15.8tn record set last year,” he said.
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However, a big problem for Chinese issuers right now is the tougher competition from alternative fixed income investments, such as wealth management and trust products, which offer yields of 8 or 9 per cent and are guaranteed by the issuing banks.
Banks are also doing more interbank business because the current tight supply of liquidity means it creates much higher returns than bonds.
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Chinese issuers are papering over the difficulties with more offshore issuance, raising a record $51.6bn outside China so far this year, according to Dealogic, a record figure and more than double the $24.5bn raised in the same period last year.
So there it is - if you can't fund domestically (since the domestic flows are being diverted into higher yielding crazy wealth products by the banks) then you borrow offshore (just like Indian, Indonesian, and Venezuelan firms) because there's plenty of yield-hungry free-money just choking the pipes of rationality around the world...