CHINA’S domestic bond market has never been riskier. It was only last year that it suffered its first default. This year at least six companies have defaulted. The miscreants are a diverse lot, including a beverage bottler, a solar-panel maker and a cement company. As economic growth grinds lower, defaults will inevitably rise.
A gloomy outlook of this kind would normally lead investors to demand a premium before buying bonds. Instead, they have lapped them up, making it cheaper for China’s companies to borrow. Bond issuance has boomed this year, reaching almost 12 trillion yuan ($1.9 trillion) so far, up from the record 7.7 trillion sold in all of 2014, according to Wind Information, a data provider. This has prompted warnings that, much like the stockmarket earlier this year, China’s bond market is swelling into a bubble.
Banks accounted for almost all lending in China until a decade ago. Today, for every five yuan of loans companies take out, they also finance themselves with one yuan of bonds. That has made China the world’s third-biggest bond market, behind America and Japan—a development that should...Continue reading
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