Two people look towards high-rise buildings in Kowloon, Hong Kong, en una foto de archivo. 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, Hong Kong, en una foto de archivo. 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.

En un joint statement Mayo 16, the People’s Bank of China (Banco Popular de China) and Hong Kong Monetary Authority (HKMA) said that “Northbound trading will commence first in the initial phase, es decir. 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 bond market (Fuente: Oppenheimer Funds)

En teoria, 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.

Hoy, prior to the bond connect, acerca de 473 foreign investment firms are active within China’s onshore bond market with investments totaling 800 mil millones de yuanes ($117 millones), de acuerdo a PBoC estimates. sin embargo, the true number of foreign firms holding Chinese debt is less than the official figures, as about 200 del 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, de acuerdo a un South China Morning Post report. en adición, 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.

Al final de 2016, foreign holdings of onshore bonds are only 1.3 percent of total market value, according to estimates from el 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 por ciento del PIB, according to ratings agency Moody 's Investors.

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, 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. En otras palabras, 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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En una foto de archivo, miners push carts containing coal at a mine in Qianwei county, Sichuan. (Liu Jin / AFP / Getty Images)En una foto de archivo, miners push carts containing coal at a mine in Qianwei county, Sichuan. (Liu Jin / AFP / Getty Images)

A rebound in global coal prices became one of the biggest stories in commodities during the second half of 2016. A more than 90 percent increase since mid-year in the benchmark Australian thermal coal prices has lifted stocks of international coal producers.

But don’t tell that to Chinese coal producers. The recent rally in coal prices hasn’t reversed the fortunes of many Chinese coal producers still wallowing in overleveraged balance sheets, high debt burden, and weak demand.

Recent bond market travails of these companies signal more defaults may lie ahead for Chinese onshore issuers as trillions of yuan in bonds become due in 2017.

Sichuan Coal Default

State-owned Sichuan Coal Industry Group missed a bond payment on Dec. 25. Un total de 1 mil millones de yuanes ($150 millón) in principal plus interest were due.

It was the second default for the coal company this year. Sichuan Coal also missed an interest payment in June but that default was ultimately resolved after the Sichuan government stepped in. Bond investors were paid at the end of July with loans from state-owned Sichuan Provincial Investment Group and a consortium of local and national banks.

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Australian thermal coal prices during last twelve months (Indexmundi.com)

Other Chinese state-owned enterprises (EPE) are experiencing similar liquidity issues. China’s biggest lender—the Industrial and Commercial Bank of China—on Dec. 30 agreed to invest in Taiyuan Iron & Steel Group, Datong Coal Mine Group, and Yangquan Coal Industry Group via debt-to-equity swaps. Such swaps have been a key tool of Beijing to reduce leverage amongst SOEs by exchanging debt for equity. The swaps instantly eliminate debt and reduce leverage ratios at the cash-strapped firms.

Steel, carbón, and other heavy industries have languished on weak global and domestic demand. Beijing also launched a program to shut underperforming mines and plants and reduce its coal producing capacity. China’s Shanxi Province in the northeast is its biggest coal-producing area, accounting for more than 25 percent of the country’s coal production last year.

Trillions of Yuan Becoming Due

Historically, bond defaults have been unheard of in China. Pero en 2016, 55 corporate defaults were recorded, more than double the number for 2015. Y 2017 will likely see even more defaults.

Mas que 5.5 billones de yuanes ($800 millones) in bonds will mature in 2017, o 1.8 trillion yuan more than 2016, according to China Chengxin International Credit Rating Group. That’s a significant amount of cash Chinese companies must come up with during the next year.

Sichuan Coal’s default—assuming the local government declines to extend another bailout—could signal that Chinese Communist authorities are willing to allow more bond defaults going forward. In truth, analysts have expected massive bond defaults for years, while Beijing has been selective in choosing which SOEs to bail out. Independientemente, the number of such bailouts has decreased, underscoring authorities’ increasing comfort level with letting companies fail. With the significant amount of bonds due in 2017, a spike in bond defaults will likely result.

Furthering the challenge facing Chinese companies is the economic backdrop, which doesn’t look friendly for the Chinese bond market.

China’s rickety financial system is built entirely on overleveraging with cheap debt.

Like the rest of the global bond market, Chinese bonds have already been under pressure from the U.S. Federal Reserve’s plans of raising short-term interest rates. This has raised yields across the globe. China’s 10-year government bond yield settled at 3.07 percent on Dec. 30, slightly lower than mid-month but far higher than the 2.8 percent range at the beginning of 2016 (bond yields and prices move in opposite directions).

Faced with increased risk of capital flight, China may elect to guide its own rates higher. But in such a scenario, raising new debt would become prohibitively more expensive during a time when many Chinese companies are facing liquidity problems amidst slowing economic growth. The central bank’s actions would further squeeze Chinese borrowers in need of new debt to roll over existing debt.

China’s rickety financial system is built entirely on overleveraging with cheap debt. It is especially susceptible to rate hikes and without the type of economic growth required to withstand such rate increases.

With so much debt becoming due and armed with few options to raise new capital, 2017 could spell disaster for cash-strapped Chinese companies.

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La gente trabaja en una plataforma de ingeniería petrolera en alta mar en Qingdao, provincia de Shandong, julio 1, 2016. Debido a demasiada deuda, una empresa de ingeniería chino ha transformado recientemente en un banco.  
(STR / AFP / Getty Images)La gente trabaja en una plataforma de ingeniería petrolera en alta mar en Qingdao, provincia de Shandong, julio 1, 2016. Debido a demasiada deuda, una empresa de ingeniería chino ha transformado recientemente en un banco.  
(STR / AFP / Getty Images)

China está desesperado por resolver varios problemas que tiene debido a su la deuda con respecto al PIB siendo al norte de 300 por ciento. Puede hallarse una muy poco convencional al permitir que las empresas se convierten en bancos, de acuerdo a un informe del Wall Street Journal.

Con las ganancias se dirigió al sur, muy endeudado gigante chino-maquinaria pesada Sany Heavy Industries dijo esta semana que obtuvo la aprobación para establecer un banco en la ciudad de Changsha, provincia de Hunan. Con 3 mil millones de yuanes ($450 millón) del capital social, que será una institución relativamente grande ya que los bancos chinos basados ​​en las ciudades van. Sanyplans a unir sus fuerzas con una compañía farmacéutica y una compañía de aluminio.

Sany ya opera una división de seguros y las finanzas con el objetivo de servicios de financiación y seguros para los clientes internos.

Sany Heavy Industries ya opera un brazo de Finanzas y Seguros, aunque no está claro lo que el oro tiene que ver con ella. (Página Web de la compañía)

Sany Heavy Industries ya opera un brazo de Finanzas y Seguros, aunque no está claro lo que el oro tiene que ver con ella. (Página Web de la compañía)

El problema de la deuda

Un problema es que las empresas están en situación de impago de los bonos y no hay ningún mecanismo de resolución adecuada para insolvencias, al menos según Goldman Sachs.

"Un proceso de resolución de la deuda más clara (por ejemplo, ¿Cómo se puede lograr la reestructuración de la deuda de los bonos públicos, cómo se llega a la valoración y recuperación de los bonos en default en, la divulgación oportuna de información y claridad sobre los procesos judiciales sancionado) ayudaría a allanar el camino para que más incumplimientos, que en nuestra opinión son necesarios si las autoridades han de cumplir con las reformas estructurales,"El banco de inversión escribe en una nota.

No sería la primera vez que China intentó el acuerdo financiero circular para resolver algunos problemas estructurales.

Al convertirse o ser propietarios de bancos, las empresas sólo puede cambiar la deuda en torno a diferentes balances para evitar un incumplimiento, aunque esto no es probablemente la resolución que Goldman Sachs tenía en mente cuando se habla de reformas estructurales.

Otro problema es que el régimen tiene cada vez más dificultades que empujan más deuda en la economía para engrasar las ruedas y mantener el crecimiento del PIB colapsen completamente.

necesidades de china 11.9 unidades de nueva deuda para crear una unidad de crecimiento del PIB. Al mismo tiempo, la velocidad del dinero o de la medida de la frecuencia con una unidad de dinero cambia de manos durante un año ha caído por debajo de 0.5, otra medida de cuán saturada es la economía con crédito antieconómico. Si la velocidad del dinero va hacia abajo, la economía necesita un mayor stock de dinero para mantener el mismo nivel de actividad.

(Macquarie)

(Macquarie)

Así que si las empresas no pueden pagar los préstamos, bancos viejos no quieren dar préstamos, y los consumidores no quieren hacer circular el dinero, puede dejar que algunas empresas se convierten en los bancos para evitar que el impago y tal vez incluso emitir nuevos préstamos a sí mismos. No sería la primera vez que China ha tratado de una arreglo financiero circular para resolver algunos problemas estructurales.

Sany no está solo

De acuerdo con el informe del Wall Street Journal, el caso Sany Heavy Industries es solamente uno de los pocos. Otras empresas en los sectores del tabaco y del recorrido, por ejemplo, se han apoderado de los bancos o formados otras nuevas.

informa ChinaTopix que la Comisión Reguladora Bancaria de China (CBRC) ya ha concedido cinco licencias para bancos privados y recibió otra 12 aplicaciones durante el último año. También se menciona que las empresas industriales están detrás de este movimiento:

"Uno de los bancos, Fujian Huatong Banco, que cuenta con un capital social de RMB3 millones ($450 millón), fue promovida por 10 compañías con sede en Fujian en diferentes sectores, incluyendo venta al por menor, fabricación y bienes raíces ".

No sabemos si el regulador tenía esto en mente cuando lanzaron la iniciativa para impulsar la banca privada en China en 2014 con el fin de mejorar el crédito al sector de la tecnología, pero no menciona explícitamente que las empresas privadas deben formar bancos.

"Se animará a las empresas privadas calificadas para establecer bancos privados. La innovación de productos, servicios, administración, y la tecnología de la banca privada inyectará nueva vitalidad en el desarrollo sostenible e innovadora del sector bancario,"Declara la CBRC en una informe sin fecha.

Queda por ver si esta es una solución sostenible a largo plazo.

Siga en Twitter Valentin: @vxschmid

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