The Chinese bond market might as well be providing early warning signs. Bond defaults edging higher with cash-starved developers breaching central bank red lines for borrowings is already triggering concerns in the $15 trillion bond market.
Chinese Bond Market Woes
The fact that only 6.3% of Chinese developers can comply with set red line limits on debt should be a point of concern. Chinese developers have close to 1.2 trillion Yuan in debt due before the end of the year. Developers are among the heaviest borrowers in China, with the likes of China Evergrande Group already tagged as red, which bars it from taking additional debt.
Likewise, there is a growing fear that Chinese corporate defaults will surge to a record high this year as debt issuers struggle to raise capital to pay down debt. With one in five biggest developers being barred from borrowing additional funding, the likelihood of them defaulting on bonds is very high.
Barring bond issuers from borrowing more from banks and other financial institutions threatens to trigger a major crisis in the Chinese bond market. By chocking off the financial lifelines, the government threatens to plunge debt issuers into default, something that could trigger a crisis in the $15 trillion marketplaces.
The government has already made it clear that it is ready to prevent the country’s debt from ballooning in a bid to avoid systematic risks to banks. By preventing bond issuers that have crossed the red line limits, the Chinese government also hopes to avert the triggering of the kind of global financial crisis experienced in 2008.
China bond markets are under immense pressure despite the country’s economy registering 2.3% growth in 2020.
Resilient European Debt Market
Amid the Chinese debt market struggles, European corporate debt markets have remained unfazed as central banks stimulus measures push investors to seek yield in the markets. Likewise, the hot European debt markets are increasingly eliciting strong demand.
Swedish company Verisure has since taken advantage of investor’s strong demand for yields, conversely raising 4.4 billion euros in new bonds and new loans. The home alarm systems company took advantage of strong demand for its bond offerings, conversely increasing the offering’s size by €53 million. The firm intends to use the net proceeds to refinance existing debt and fund large payments to shareholders.
Qatar Investment Authority Big Bet
Another clear indication that it is not all gloom in the bond markets is the fact that Qatar Investment Authority is in for a huge payout on a bet made on distressed debt and highly rated bonds at the start of the COVID-19 pandemic.
The Sovereign wealth fund bet that investment-grade bonds that had tanked to record lows on the cutting of interest rates would rebound. The S&P 500 Investment Grade Corporate Bond index has since gained about 20% since hitting lows in Mid-March.
QIA had also invested huge sums of money on distressed credit, including funds that help struggling companies. The investment has also paid off, as evidenced by the S&P 500 U.S High Yield Corporate Distressed Bond Index gaining more than 80% from March lows.