Additionally the Chinese domestic bond market remains disjointed in regards to its regulatory framework across both instruments and trading stages. China still has multiple regulators overseeing numerous debt instruments traded mostly on the two diverse markets of the stock exchanges and the interbank bond trading platform. For example, the CGB benchmark yield curve is separated with the tenor under one year under de facto PBOC supervision and the rest under de facto MOF supervision. (Su,2006) Most would agree that such a fragmentation hurts Chinese bond market development, not only separating market liquidity, but also resulting in monitoring arbitrage, disorganization and more financing costs.
Likewise, China’s massive bond market is falling victim to a wave of defaults as the local issuers have recently cancelled 61.9 billion Yuan of bond sales in 1 month alone. The investors in Yuan-denominated company notes have driven up yields for 9 of the last 10 days as Standard & Poor’s assessment of Chinese bond market has worsened further. (Bloomberg News, 2016)
The graph shows how the 7-year bond yields have been lower than historical averages.Another reason is the debt boom as China keeps growing reliance on debt, with the aggregate financing doubling to 2.34 trillion Yuan in a year and the fact that 3 of the 7 defaulting companies in 2016 are owned by their government. Furthermore, earlier this month, a government firm of transformers Baoding Tianwei Co. failed to repay principal and interest on five-year bonds. The extra yield investors demand to hold seven-year onshore corporate bonds has jumped by 28to 91 basis points.
At least 64 Chinese firms have postponed or scrapped planned note sales this month, and the yield premium is projected to rise by 30 to 50 basis points very soon. As their head of Fixed Income Research would put it: “To Chinese investors at the moment, default risks are high almost everywhere.”
The local Yuan junk bonds are also facing worst selloff in 2 years. Their yield premium has widened 17 basis points and most of them haven’t fully priced yet in default risks. Interest rates have been reduced 6 times to tackle the massive debt which takes up 247% of GDP (Bloomberg News, 2016).
Moreover, several firms have wasted financial resources, slowing the bond market growth by 7%. Such firms must repay 31.3 billion of onshore bonds rated AA- or lower this year. The economists estimate the yield spreads to increase further due to the recent default events.