Together with Greece briefly soaring to prominence over the summer (only to fade into perpetual obscurity in its new role as Germany’s certified Mediterranean colony), the biggest event of this past summer – before the EM capital flow/Fed non-rate hike fiasco – was the rapid boom and spectacular bust of China’s equity market, which culminated not only in arrest of sellers, but in the hiking of futures margins so high that nobody actually trades in China any more.
However, China’s equity bubble was just the beginning. As we showed in “If You Thought China’s Equity Bubble Was Scary…” even after the Shanghai Composite crashed in the fall, Chinese bonds spreads continued plunging oblivious of everything that was taking place in the stock market.
This historic bond bubble is paradoxical for the simple reason that China’s credit fundamentals have never been worse, and as we further showed, as a result of the ongoing collapse in commodity prices (which today’s Chinese rate and RRR-cut will have absolutely no impact on), more than half of commodity companies can’t generate the cash required to even pay their interest, a number which drops to “only” a quarter when expanded to all industries.
“The equity rout merely reflects worries about China’s economy, while a bond market crash would mean the worries have become a reality as corporate debts go unpaid,” said Xia Le, the chief economist for Asia at Banco Bilbao. “A Chinese credit collapse would also likely spark a more significant selloff in emerging-market assets.”
“Global investors are looking for signs of a collapse in China, which itself could increase the chances of a crash… This game can’t go on forever.”
They will find it soon, because while China may have managed to once again kick the can on its most recent default when state-owned SinoSteelfailed to pay due principal and interest this Tuesday only to get a quasi-government bailout, every incremental bail out merely forces even more cash misallocation and even more foolish “investments” into this high risk asset class as investors ignore any concerns about fundamentals, assuming instead that the government will always bail them out.
