The Threat Of A Chinese Financial Crisis Is Growing –

At the beginning of 2016, markets around the world started to slide on speculation that China was rapidly heading towards a financial crisis. Twelve months on, and no such crisis has yet emerged.

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The Threat Of A Chinese Financial Crisis Is Growing

Analysts at Morgan Stanley believe that China is living on borrowed time. The significant sell-off in China’s bond market post-Fed rate hike has led to market concerns of a liquidity crunch within the country. The People’s Bank of China injected Rmb 205 billion into the country’s credit markets between December 13 and December 15 in an attempt to loosen credit conditions after a broad-based sell-off in China’s bond market which saw yields spike. In particular, the 10Y government bond yield jumped 22bp to 3.45%, the highest level since August 2015.

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The Federal Reserve’s decision to hike interest rate isn’t the only factor sending jitters through China’s bond market. As well as higher US interest rates, the People’s Bank of China has also been attempting to curb leverage in the bond market by tightening wholesale funding rates. At the same time, Chinese banks/insurance companies have been conducting their year-end asset rotation, which this year entails the shift away from bonds due to the expectation of further tightening from the country’s central bank. Further, China’s bond investors have become increasingly cautious since the Rmb 500 million bond default by Hualong Securities on December 13, as well as market concerns of a possible bond default by Guohai Securities.

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