In early November, we discussed how commentators were disturbed by the sell-off in Chinese government bonds after the Party Congress, which saw yields rise to 4.0%. The anomaly was that yields in less-liquid, unsecured Chinese corporate bonds had barely moved. Some sleuthing on the part of the Wall Street Journal discovered that the most likely explanation was that redemptions in China’s shadow banking sector, especially in the infamous $4 trillion Wealth Management Products (WMP), meant that cash needed to be raised…quickly. Highly liquid government bonds were the easiest option. Furthermore, retaining the higher-yielding corporate bonds was handy in meeting the guaranteed returns in the WMP Ponzi schemes.
The relative stability in corporate bond yields was short-lived, with the Chinese bond sell-off spreading to the corporate sector as November progressed. Besides the post-Congress focus on deleveraging, the mainstream explanation was that investors were differentiating between good and bad credits ahead of more than $1 trillion of local bonds maturing in 2018-19. The spin was positive as it would lead to capital being channeled more productively.
Needless to say, this was not how we viewed it. From our perspective, it looked like the emergence of cascading sell-offs within Chinese financial markets which have been abused by excessive leverage and Ponzi characteristics. Recent plunges in Chinese equities have strengthened our conviction. Indeed, as the new trading week opened, equities were hit again, as we pointed out last night and as Bloomberg observes this morning:
After taking a breather in the wake of a battering Thursday, Chinese shares resumed their decline Monday, with some previously high-flying consumer and technology companies among the hardest hit. The CSI 300 Index of large-cap stocks was down 1.3 percent as of the mid-day trading break, with ZTE Corp. and BOE Technology Group Co. both falling more than 6 percent…’Institutional investors are choosing to cash in toward year-end as valuations are near historic highs and market sentiment deteriorated after official media targeted Moutai,’ said Shen Zhengyang, Shanghai-based analyst at Northeast Securities Co. He said the market ‘lacks steam’ for further gains.
This post was published at Zero Hedge on Nov 27, 2017.