The IMF shows risks in China's debt markets as global popularity boom
The IMF shows risks in China's debt markets as global popularity boom
The IMF shows risks in China's debt markets as global popularity boom
China's $ 12 billion bond market is becoming more popular among foreign investorsAccording to the International Monetary Fund, abrupt changes in commercial volumes could represent a risk to the country's financial stability.
What's going on
Commercial activity in the world's third largest bond market closely monitors volumes in the Chinese market in search of deposits, or repurchase agreements, in which banks, investors and financial firms are committed to obtaining loans Cash for short periods, often at night.
Snapshot of Asian markets
- Japan's Nikkei led declines in Asia, falling 1.9% on Monday.
- Stock indexes in Hong Kong and Shanghai fell 1.5% and 1.4%, extending last week's losses.
- The dollar rose 0.1% to 6,928 Chinese yuan in the offshore markets.
According to the IMF's Global Financial Stability Report of October 2018, the trading volumes of Chinese government and corporate bonds have been much more volatile than in the US. UU
This is likely because most of the bond purchases in China were financed with borrowed money. In 2017, the repurchase loan was 15 times higher than the average daily trading volume in the Chinese bond market, twice as high as the maximum level registered in the US. UU
In recent years, the Chinese bond trade plummeted every time the cost of short-term loans increased. Activity increased when interest rates fell. The bond trading volumes have fluctuated up to 200% in one year, according to the IMF report, following that pattern.
"This pro-cyclical link between the bond trade and financial conditions represents a significant vulnerability in China's financial markets," wrote IMF financial expert Henry Hoyle. The concern is that the liquidity of the bond market could quickly deplete if interest rates change rapidly, making it difficult for financial institutions to sell assets or renew their repurchase loans for financing.
According to Mr. Hoyle, a vicious circle could arise if the increased demand for short-term loans raises rates and further reduces liquidity.
Meaning
China's bond market has become increasingly important for international investors, who this year became the biggest buyers of Chinese government debt.
Brad Setser, economist at the Council on Foreign Relations, noted that foreign demand for Chinese bonds exceeded foreign demand For US bonds in the second quarter of 2018.
The participation in the Chinese bond market of foreign investors is still relatively small, or below 3%, according to China Central and the Deposit. Interest has grown with the prospect of the inclusion of bonds in main debt indices.
The IMF report suggests that the growing presence of foreign investors could be a soothing influence on the commercial volatility of the Chinese bond market, but rampant activity is something that should be monitored for potential foreign buyers.
Write to Mike Bird in Mike.Bird@wsj.com
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ORIGINAL ARTICLE THE WALL STREET JOURNAL
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