In an innocuous release from the Chinese Central Bank several days ago, it is apparent that the mounting credit crisis is getting the attention of the Chinese government. The Peoples’ Bank of China (PBOC) is attempting to tweak its monetary strategy regarding the management of its reserve requirements. Facing the pressure of a slowdown in the Chinese economy and dissatisfaction among corporations, especially private firms, the People’s Bank of China rolled out two new monetary policy instruments in late January. One can’t imagine that much travels under the radar in the Chinese branch of finance.
Bondholders of yuan based debentures and other fixed income instruments are rightly nervous. Two large Chinese borrowers missed payment deadlines this month, underscoring the risks piling up in a credit market that’s witnessing the most corporate failures in history. Two culprits in particular that the PBOC is eyeing. China Minsheng Investment Group Corp., a private investment group with interests in renewable energy and real estate, hasn’t returned money to bondholders that it had pledged to repay on Feb. 1. In addition, Wintime Energy Co., which defaulted last year, didn’t honor part of a restructured debt repayment plan just last week.
Significant bondholder issues as these are undermining the $11 trillion dollar Chinese bond market, which comrades in high places will not allow. The failure of these firms would be enormous, and would potentially signal a deepening of the credit crisis.
Chinese regulators are giving commercial banks the green light to issue perpetual bonds and strengthen their capital positions, so as to encourage them to extend more credit to the economy, especially private companies. The PBOC has typically utilized monetary policy in a similar fashion to that of the FED. The central bank increases its own balance sheet by injecting liquidity into the interbank market. Typically, the central bank purchases government bonds from commercial banks, giving more cash to the banks, and that eventually leads to more lending. Thus, the banks expand lending to the real economy and boost real growth. The reserve requirements are also tweaked in the same attempt to stimulate growth. However, massive liquidity injections have seemingly reached their limits. This is when regulators get anxious. What tends to happen is that commercial banks in China will slow down lending to smaller businesses, and increase their credit to government controlled entities, assuming they inherently have less risk. The PBOC walks a slippery slope by moving beyond its traditional monetary approach, and is now directly guiding commercial banks’ lending activities.
Statistics from ChinaBond Data show the yield spread on five-year AA- rated notes, considered a junk score in China, is still more than 300 basis points over top-rated peers, more than twice the level of a year earlier. According to Anne Zhang, executive director for fixed income, currencies and commodities at JPMorgan Private Bank, “The market is clearly pricing in a lot of credit differentiation as access to refinance remains firmly shut for certain issuers yet widely open for others.” The move by the PBOC shows that one thing is clear, the Chinese central bank is moving at full speed to bolster the private sector and head-off the looming credit crisis.