The local markets are being shocked by China's latest efforts to crack down on high and increasingly risky forms of debt in its financial system.
Investors are kept on edge as more loans are defaulting, bond yields are rising and stocks are falling.
"Most equity investors we talked to recently cared much more about the financial regulation than the real economy," Macquarie's head of Greater China economics, Larry Hu said in a note released late Sunday ET. "We remain cautious for now regarding the financial market, as regulations are weighing on risk appetite and pushing up interest rates."
authorities are reportedly including murky off-balance-sheet wealth management products in their assessments of banks' finances and in the last several months, the People's Bank of China has raised short-term interest rates. The Shanghai composite is roughly flat for the year as tighter regulation on Chinese stock markets has also dampened stocks.
According to Macquarie's Hu, noting its highest since August 2016, the Chinese government 10-year bond yield closed last week at 3.56 percent. Expected Federal Reserve rate hikes also act to boost rates and high interest rates increase the burden of debt Chinese companies must repay.
"The upward repricing of interbank market rates ... since the start of the year has led to worries that further aggressive tightening in short-end rates may trigger more selling pressure in the domestic bond market," Kinger Lau, chief China strategist at Goldman Sachs, said in a Friday note.
After the Fed raised rates and surprised markets by saying it would deliver three hikes in 2017, rather than the two that were expected, the Chinese 10-year field jumped to its highest in more than a year last December and Lau added that the situation could lead to "unfavorable" effects on stocks similar to that event.
According to data from Shanghai-based Wind Information, from 23 in 2015 to 79 in 2016, the number of Chinese bond defaults has also picked up in the last year. So far this year, Wind data shows 16 bond defaults.
Three years ago in 2014, the very first Chinese bond default on record had taken place. In a show of slightly freer markets, more companies, especially those in oversupplied industries such as steel, would be allowed to default on their debt by Beijing, most analysts anticipate. But experts generally don't expect bond defaults to become widespread across China.
"A little bit of market disruption will be needed to convey the seriousness of the tightening and to alter market behavior, but too much is unlikely to be allowed. As always in China, the pace of reform will be controlled. China does not like 'Big Bang' reforms," said James Stent, author of "China's Banking Transformation" and a former board member of China Minsheng Bank and China Everbright Bank.
"The timing has been delayed until the economy is performing well enough to permit this tightening without endangering economic growth. Now the timing is good, as the economy can withstand being reined in," Stent said.
Signs of growing financial and economic maturity may be signaled by the steps Beijing has taken recently.
(Source:www.cnbc.com)
Investors are kept on edge as more loans are defaulting, bond yields are rising and stocks are falling.
"Most equity investors we talked to recently cared much more about the financial regulation than the real economy," Macquarie's head of Greater China economics, Larry Hu said in a note released late Sunday ET. "We remain cautious for now regarding the financial market, as regulations are weighing on risk appetite and pushing up interest rates."
authorities are reportedly including murky off-balance-sheet wealth management products in their assessments of banks' finances and in the last several months, the People's Bank of China has raised short-term interest rates. The Shanghai composite is roughly flat for the year as tighter regulation on Chinese stock markets has also dampened stocks.
According to Macquarie's Hu, noting its highest since August 2016, the Chinese government 10-year bond yield closed last week at 3.56 percent. Expected Federal Reserve rate hikes also act to boost rates and high interest rates increase the burden of debt Chinese companies must repay.
"The upward repricing of interbank market rates ... since the start of the year has led to worries that further aggressive tightening in short-end rates may trigger more selling pressure in the domestic bond market," Kinger Lau, chief China strategist at Goldman Sachs, said in a Friday note.
After the Fed raised rates and surprised markets by saying it would deliver three hikes in 2017, rather than the two that were expected, the Chinese 10-year field jumped to its highest in more than a year last December and Lau added that the situation could lead to "unfavorable" effects on stocks similar to that event.
According to data from Shanghai-based Wind Information, from 23 in 2015 to 79 in 2016, the number of Chinese bond defaults has also picked up in the last year. So far this year, Wind data shows 16 bond defaults.
Three years ago in 2014, the very first Chinese bond default on record had taken place. In a show of slightly freer markets, more companies, especially those in oversupplied industries such as steel, would be allowed to default on their debt by Beijing, most analysts anticipate. But experts generally don't expect bond defaults to become widespread across China.
"A little bit of market disruption will be needed to convey the seriousness of the tightening and to alter market behavior, but too much is unlikely to be allowed. As always in China, the pace of reform will be controlled. China does not like 'Big Bang' reforms," said James Stent, author of "China's Banking Transformation" and a former board member of China Minsheng Bank and China Everbright Bank.
"The timing has been delayed until the economy is performing well enough to permit this tightening without endangering economic growth. Now the timing is good, as the economy can withstand being reined in," Stent said.
Signs of growing financial and economic maturity may be signaled by the steps Beijing has taken recently.
(Source:www.cnbc.com)
