Two people look towards high-rise buildings in Kowloon, Hongkong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)Two people look towards high-rise buildings in Kowloon, Hongkong, in a file photo. The Hong Kong Monetary Authority and Beijing have agreed to launch a cross-border bond connect, granting foreign investors access to the Chinese onshore bond market. (Antony Dickson/AFP/Getty Images)

Beijing and Hong Kong have approved a new cross-border bond trading program, called bond connect, hoping to attract a new wave of foreign investors to buy Chinese onshore bonds.

The platform is similar in theory but differs in execution to the existing stock connect between Hong Kong and the mainland, which allows foreign investors to purchase mainland stocks. The bond connect will link Hong Kong to Shenzhen’s bond markets and is expected to go live on July 1, the 20th anniversary of Hong Kong’s handover to China.

Beijing hopes the bond connect will legitimize its bond market on the global stage and help diversify bearers of onshore default risk. But immediate success is unlikely, given the existing lukewarm reception of the similar stock connect program and overall investor skepticism of Chinese credit.

Expanding Access

China is the world’s third largest bond market following the United States and Japan, but is largely closed off from foreign investors. It first opened the onshore bond market to foreign investors in February 2016. Under this arrangement, foreign asset managers wishing to purchase such bonds must register locally in mainland China.

The bond connect will officially eliminate that requirement, as firms in Hong Kong will have the ability to purchase onshore bonds at will, without a mainland license.

In einem joint statement Kann 16, the People’s Bank of China (PBoC) and Hong Kong Monetary Authority (HKMA) said that “Northbound trading will commence first in the initial phase, d.h. overseas investors from Hong Kong and other countries and areas (overseas investors) to invest in the China Interbank Bond Market.” The opposite southbound trading, or mainland investors investing in Hong Kong bonds, will commence in the second phase at a later date.

Oppenheimer_bonds1

China is the world’s No. 3 Anleihemarkt (Quelle: Oppenheimer Funds)

In der Theorie, bond connect will no doubt expand the market for Chinese onshore bonds and bring in a new wave of investors. “The major advantages of the Bond Connect compared to the existing China Interbank Bond Market scheme are the speed of gaining the access and the fewer onshore account set up needed,” Gregory Suen, investment director of fixed income at HSBC Global Asset Management, told industry publication Fund Selector Asia.

Heute, prior to the bond connect, etwa 473 foreign investment firms are active within China’s onshore bond market with investments totaling 800 Milliarden Yuan ($117 Milliarde), gemäß PBoC estimates. aber, the true number of foreign firms holding Chinese debt is less than the official figures, as about 200 des 473 are investors from the Chinese territory of Hong Kong, which Beijing deems foreign.

To cater to the anticipated trade flow, the Hong Kong Exchanges and Clearing and China Foreign Exchange Trade System formed a joint venture on June 7 called the Bond Connect Company to offer trading and support services to market participants of the bond connect.

‘Not a Case of Build It and They Will Come’

Beijing hopes demand for bond connect from foreign institutional investors will exceed the lackluster enthusiasm investors currently have for the Hong Kong-Shenzhen stock connection, where trading activity remains tepid.

But that’s far from a certainty.

The Hong Kong-Shenzhen stock connect has been open for six months, but logistical and demand issues remain. Clearing and settlement differences between Shenzhen and Hong Kong regulators have caused a sizable portion of trades to fail in recent months, nach a South China Morning Post report. In Ergänzung, foreign demand for Shenzhen stocks so far hasn’t met Beijing’s expectations, with the technology-heavy Shenzhen issuers viewed as perhaps too risky for foreign investors.

It’s difficult to see bonds faring better. Despite Beijing’s opening up the domestic bond market to foreign investors last February—with no approval necessary as long as the investor has a local registered entity—foreign ownership of China’s bond market remains tiny.

Am Ende von 2016, foreign holdings of onshore bonds are only 1.3 percent of total market value, according to estimates from die Financial Times.

That means investors don’t believe the investment returns on Chinese bonds are enough to justify the heightened default risk of owning Chinese debt, which has fueled much of China’s recent economic growth and today sits at almost 260 Prozent des BIP, according to ratings agency Moody 's Investors Service.

Looking past macro issues, individual bonds are also notoriously hard to evaluate for foreign investors.

The industry standard global credit rating agencies of Standard & Poor’s, Moody 's Investors Service, and Fitch Ratings are barred from operating in China. Chinese bonds are instead rated by domestic ratings agencies, which are viewed by foreign investors with distrust for granting overly generous credit ratings. Mit anderen Worten, it’s difficult to assess the credit-worthiness of Chinese issuers because information on bonds is unreliable.

Oppenheimer_bonds2

Investors believe Chinese domestic credit rating agencies have tendencies to give out overly generous ratings to bond issuers (Oppenheimer Funds).

“For foreign investors, it’s not a case of build it and they will come,” concluded Rachel Ziemba, Managing Director at Roubini Global Economics, on CNBC. “They want to understand, they want to be paid for the risks they are taking on. In an environment where interest rates are rising in China, where the property market is flattening out a bit, that question mark about more information and drivers is going to be very important.”

The new U.S.-China trade deal signed during Chinese Communist Party leader Xi Jinping’s visit with U.S. President Donald Trump in April outlined a path for the U.S. credit rating agencies to begin operations in China later this year.

To foreign investors, that’s a step in the right direction, while also introducing new challenges. Foreign credit agencies will operate under supervision of Chinese securities regulators. During times of economic duress, can they remain independent and objective?

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In einer Datei Foto, Bergleute schieben Karren an einer Mine in Qianwei Kreis enthält Kohle, Sichuan. (Liu Jin / AFP / Getty Images)In einer Datei Foto, Bergleute schieben Karren an einer Mine in Qianwei Kreis enthält Kohle, Sichuan. (Liu Jin / AFP / Getty Images)

Ein Rebound in der globalen Kohlepreise wurde zu einem der größten Geschichten in Waren während der zweiten Hälfte des 2016. Ein mehr als 90 prozentigen Anstieg seit Mitte des Jahres in den Benchmark australischen Thermalkohlepreise hat Bestände der internationalen Kohleproduzenten angehoben.

Aber sagen Sie nicht, dass der chinesischen Kohleproduzenten. Die jüngste Rallye der Kohlepreise hat nicht das Schicksal vieler chinesischer Kohleproduzenten wälzen noch in schuldeten Bilanzen umgekehrt, hohe Schuldenlast, und die schwache Nachfrage.

Jüngste Rentenmarkt travails dieser Unternehmen signalisieren, mehr Vorgaben für die chinesischen Onshore-Emittenten liegen vor als Billionen Yuan in Anleihen werden fällig 2017.

Sichuan Coal Standard

Staatlichen verpassten Sichuan Coal Industry Group eine Anleihe Zahlung Dezember. 25. Insgesamt 1 Milliarden Yuan ($150 Million) in Kapital plus Zinsen waren wegen.

Es war der zweite Standard für die Kohle-Unternehmen in diesem Jahr. Sichuan Coal verpasste auch eine Zinszahlung im Juni, aber das Standard wurde schließlich aufgelöst, nachdem die Sichuan Regierung trat in. Bond Investoren wurden Ende Juli mit Darlehen aus staatlichen Provinz Sichuan Investment Group und ein Konsortium aus lokalen und nationalen Banken bezahlt.

ATC_Coal

Australian Thermalkohlepreise im letzten zwölf Monaten (Indexmundi.com)

Andere chinesische Staatsunternehmen (SOEs) erleben ähnliche Fragen Liquidität. Chinas größter Kreditgeber-die Industrial and Commercial Bank of China-on Dezember. 30 vereinbart in Taiyuan Iron zu investieren & Steel Group, Datong Coal Mine Group, und Yangquan Coal Industry Group über Debt-to-Equity-Swaps. Solche Swaps haben ein wichtiges Instrument gewesen durch Tausch von Schulden gegen Eigenkapital Leverage unter SOEs von Peking zu reduzieren. Die Swaps sofort Schulden zu beseitigen und Hebelverhältnisse an den leeren Kassen Firmen reduzieren.

Stehlen, Kohle, und andere Schwerindustrie haben sich auf schwachen globalen und inländischen Nachfrage geschmachtet. Peking startete auch ein Programm zu schließen underperforming Minen und Anlagen und reduzieren ihre Kohle Produktionskapazität. Chinas Provinz Shanxi im Nordosten ist die größte Kohle produzierenden Bereich, die mehr als 25 Prozent der im vergangenen Jahr die Kohleproduktion des Landes.

Trillionen Yuan Due Becoming

Historisch, Bindung Standardwerte haben in China unbekannt gewesen. Aber in 2016, 55 Unternehmensinsolvenzen wurden aufgezeichnet, mehr als doppelt so viele für 2015. Und 2017 wird wahrscheinlich noch mehr Ausfälle sehen.

Mehr als 5.5 Billionen Yuan ($800 Milliarde) in Schuldverschreibungen werden in 2017, oder 1.8 Billionen Yuan mehr als 2016, nach China Chengxin internationalen Rating-Gruppe. Das ist eine erhebliche Menge an Bargeld chinesischen Unternehmen mit im nächsten Jahr kommen müssen.

Sichuan Coal default-Übernahme der lokalen Regierung Rückgänge gegenseitig zu erweitern Bailout-könnte signalisieren, dass die chinesischen kommunistischen Behörden sind bereit, mehr von Schuldverschreibungen zu ermöglichen, geht nach vorn. In Wahrheit, Analysten haben massiven Anleiheausfälle seit Jahren erwartet, während Peking bei der Auswahl ist selektiv gewesen, die aus der Klemme zu helfen SOEs. Ungeachtet, die Anzahl solcher Rettungsaktionen abgenommen hat, Behörden steigenden Komfortniveau unterstreicht mit der Vermietung Unternehmen scheitern. Mit der erhebliche Menge an Anleihen fällig 2017, eine Spitze in Bindung Standardwerte wird wahrscheinlich dazu führen.

Förderung der Herausforderung chinesischen Unternehmen mit Blick auf die wirtschaftlichen Rahmenbedingungen, die für den chinesischen Anleihemarkt nicht freundlich aussehen.

Chinas wackeligen Finanzsystem ist ganz auf overleveraging mit billigen Schulden gebaut.

Wie der Rest des globalen Rentenmarkt, Chinesische Anleihen wurden bereits unter dem Druck der US-gewesen. Federal Reserve Pläne der Anhebung kurzfristigen Zinsen. Dies hat die Renditen auf der ganzen Welt erhöht. Chinas 10-jährige Staatsanleihen ließen sich an 3.07 Prozent auf Dezember. 30, etwas niedriger als Mitte des Monats aber weit höher als die 2.8 Prozentbereich zu Beginn 2016 (Anleiherenditen und die Preise bewegen sich in entgegengesetzte Richtungen).

Konfrontiert mit einem erhöhten Risiko der Kapitalflucht, China kann wählt seinen eigenen Preise höher zu führen. Aber in einem solchen Szenario, während einer Zeit, als viele chinesische Unternehmen Liquiditätsprobleme Wirtschaftswachstum gegenüber inmitten Verlangsamung würde unerschwinglich teurer neuen Schulden erhöhen. Die Maßnahmen würden die Zentralbank weiter quetschen chinesischen Kreditnehmer Bedarf an neuen Schulden bestehenden Schulden zu rollen.

Chinas wackeligen Finanzsystem ist ganz auf overleveraging mit billigen Schulden gebaut. Es ist besonders anfällig für Zinserhöhungen und ohne die Art des Wirtschaftswachstums erforderlich, um solche Ratenerhöhungen zu widerstehen.

Mit so viel Schulden fällig werdenden und mit wenigen Optionen bewaffnet neues Kapital zu beschaffen, 2017 Zauber Katastrophe für knapp bei Kasse chinesischen Unternehmen könnten.

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People work at an offshore oil engineering platform in Qingdao, Shandong province, Juli 1, 2016. Because of too much debt, a Chinese engineering company has recently transformed itself into a bank.  
(STR / AFP / Getty Images)People work at an offshore oil engineering platform in Qingdao, Shandong province, Juli 1, 2016. Because of too much debt, a Chinese engineering company has recently transformed itself into a bank.  
(STR / AFP / Getty Images)

China is desperate to solve several problems it has due to its debt to GDP ratio being north of 300 Prozent. It may have found a pretty unconventional one by letting companies become banks, nach a Bericht des Wall Street Journal.

With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan Province city of Changsha. Mit 3 Milliarden Yuan ($450 Million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sanyplans to join forces with a pharmaceutical company and an aluminum company.

Sany already operates an insurance and finance division with the goal of internal financing and insurance services for clients.

Sany Heavy Industries already operates a Finance and Insurance arm, although it's unclear what gold has to do with it. (Company Website)

Sany Heavy Industries already operates a Finance and Insurance arm, although it’s unclear what gold has to do with it. (Company Website)

Debt Problem

One problem is that companies are defaulting on bond payments and there is no adequate resolution mechanism for bad debts, at least according to Goldman Sachs.

“A clearer debt resolution process (beispielsweise, how debt restructuring on public bonds can be achieved, how valuation and recovery on defaulted bonds are arrived at, the timely disclosure of information and clarity on court-sanctioned processes) would help to pave the way for more defaults, which in our view are needed if policymakers are to deliver on structural reforms,” the investment bank writes in a note.

It would not be the first time China tries a circular financial arrangement to solve some structural issues.

By becoming or owning banks, the companies can just shift debt around different balance sheets to avoid a default, although this is probably not the resolution that Goldman Sachs had in mind when talking about structural reforms.

Another problem is that the regime has more and more difficulties pushing more debt into the economy to grease the wheels and keep GDP growth from collapsing entirely.

China needs 11.9 units of new debt to create one unit of GDP growth. Gleichzeitig, the velocity of money or the measure of how often one unit of money changes hands during a year has fallen to below 0.5, another measure of how saturated the economy is with uneconomical credit. If the velocity of money goes down, the economy needs a higher stock of money to keep the same level of activity.

(Macquarie)

(Macquarie)

So if companies can’t pay back loans, old banks don’t want to give out loans, and consumers don’t want to circulate the money, you can just let some companies become banks to prevent them from defaulting and maybe even issue new loans to themselves. It would not be the first time China has tried a circular financial arrangement to solve some structural issues.

Sany Not Alone

According to the Wall Street Journal report, the Sany Heavy Industries case is only one of a few. Other companies in the tobacco and travel sectors, beispielsweise, have taken over banks or formed new ones.

ChinaTopix reports dass die China Banking Regulatory Commission (CBRC) has already awarded five licenses for private banks and received another 12 applications during the past year. It also mentions that industrial firms are behind this move:

“One bank, Fujian Huatong Bank, which has a registered capital of Rmb3 billion ($450 Million), was promoted by 10 Fujian-based companies in different sectors, including retail, manufacturing and real estate.”

We don’t know if the regulator had this in mind when they launched the initiative to boost private banks in China in 2014 in order to improve lending to the technology sector, but it did explicitly mention that private companies should form banks.

“Qualified private enterprises shall be encouraged to set up private banks. The innovation of products, Dienstleistungen, management, and technology by private banks will inject new vitality into the sustainable and innovative development of the banking sector,” the CBRC states in an undated report.

It remains to be seen whether this is a long-term sustainable solution.

Folgen Sie Valentin auf Twitter: @vxschmid

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