Is there a bubble in the Chinese bond market?
Just as the Chinese stock market crashed over the summer, a slew of corporate bonds flooded the market, giving investors an enticing alternative for their cash.
But in much the same way the Chinese government encouraged investors to buy stocks when the real estate market tumbled, the China Securities Regulatory Commission (CSRC) sparked a bond market boom by easing regulations this year to open the path for more fixed-income issues. Many pay interest between 4% and 7%.
The result was the issuing of many low quality bonds that may have encouraged investors to accept too much risk, reports Chinese news agency Caixin. While Caixin doesn’t come right out and say it, the numbers make Asia Unhedged think there’s good potential for a crash in the Chinese bond market.
The bond rally started in June just as the Shanghai Composite Index began its summer-long slide back to 2007 levels.
According to financial data provider Wind Info, the value of new corporate bond issues in August hit a single-month record of more than 100 billion yuan, or about 72% of the all the bonds issued last year.
Property developers issued about half of the 500 billion yuan worth of corporate bonds sold between January and September 1, Wind Info said, compared with just 23.5 billion yuan worth last year. Local government investment vehicles accounted for another 20% of all issues through August.
Critics said the CSRC weakened supervision of the corporate bond market in order to promote marketization, reports Caixin. This resulted in bond issuers pushing dangerously low-quality paper into investor hands.
“Different standards (set by regulators) for bonds issued on the interbank market, stock exchanges and for the government-approved enterprise bonds may have left room for regulatory arbitrage and risk accumulation,” a fixed-income department manager at a securities firm, who asked not to be named, told Caixin.
Regulators told Caixin that the bond rules were eased to encourage market forces. But the securities firm source noted, “marketization doesn’t mean complete deregulation. Easing controls on credit standards to pursue the goal of a larger market will lead to future problems.”
Analysts say the rule changes have left investors open to excessive risk, which may bring unpleasant surprises.
Sounds like a warning to us.