Rising corporate bond defaults a serious concern for China’s bond market

In 2016, China’s 10-year government bond yield rose 13 basis points to 2.95 percent through Monday. This was the only rise amongst similar-maturity sovereign debt in the 15 biggest economies globally. China’s bonds have been sold off in the midst of worries that accelerating inflation, overheating property market and stability in growth will stop further easing of monetary policy.

According to Insight Investment Management and Fidelity International, investors are failing to purchase China’s bonds at lower prices as the country opens up its USD 8.5 trillion market to foreign funds and a slowing economy sets off additional stimulus. Last week, the spread between China’s yield and that of the U.S. Treasuries was the broadest in 10 months as worries regarding the possibility of Brexit stimulated demand for havens.

"Bond market moves based on the perception on inflation risks, default risks and monetary policy direction. QE dominated many the bond markets in many countries and exit of QE influenced the US bond market. The Chinese domestic bond market is less affected by the global events, but by the concerns of debt default”, Dong Tao,Credit Suisse's Managing Director and Chief Economist for non-Japan Asia, told FxWirePro.

According to S&P Global, default in Chinese domestic bond markets are expected to keep increasing as corporate profitability continues be under pressure and debt burdens rise.

“I don’t think sovereign default is a real issue, but corp bond default is an issue and systemic risk is an issue. Of course, PBoC’s recent tightening in policy stance was also a factor to the bond market sell-off”, added Dong Tao.