Playing in the Riskiest Market of All: The Corporate Bond Market in China

Playing in the Riskiest Market of All: The Corporate Bond Market in China

A ‘haven’ — the Financial Times called it.

Safe harbour’ wrote Asia Times Financial.

Since the markets have taken a tumble, bond investors have ‘swarmed’ into certain Chinese investments.

With some US$20 billion finding its way into the corporate bond market in the Middle Kingdom.

So much money has flowed so quickly East, that financial newspapers around the world began asking aloud if this was the safe trade to make in the post-coronavirus world.

Is this sector of the globe really a financial haven?

Or, is it more likely the only place Wall Street can try to offset some of those losses in?

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Last year it threatened to undo the financial markets

In all my years, I never thought I’d see the day mainstream rags called the Chinese corporate bond sector a safe haven.

Yet here we are, shuttered in doors, mere weeks from freedom, calling the Middle Kingdom’s bond market a safe place for investors.

Or is it?

Just last year the Chinese corporate bond market was threatening to undo the financial markets.

In October Chinese authorities were stepping in to prevent defaults.

By December financial rags were telling us that we shouldn’t trust what lurks beneath the surface here…

Chinese authorities warned brokers not to allow companies to issue more than 40% of a company’s net assets in bonds.

As recently as January this year, the Middle Kingdom was very aware of the potential wave of defaults in the corporate bond market.

At a similar time, CBNC pointed out how the level of debt was impacting the corporate bond sector in China. Defaults were happening at the fastest rate, and outside investors (even the so-called experts) don’t fully understand how this market works…

What a difference four months can make.

Overnight the Wall Street Journal tells us the Chinese government is no longer worried about the threat of corporate debt. That they are far more interested in ensuring growth remains than several trillion yuan in defaults becoming a problem.

It seems the ‘growth first, deal with the debt later’ mantra lives on.

Yet the Chinese corporate bond market isn’t quite like our own.

Why would anyone invest in Chinese corporate bonds?

Which brings us to traders and Wall Street.

Given the almost uncalculatable risk that comes with investing in Chinese corporate bonds, why would anyone do it?

Simply put, traders will chance anything with a whiff of a return and a pulse.

In other words, in a yield-starved world, the risk of not getting an investor’s money back is more appealing than the perceived safety of other instruments.

On average, Chinese corporate bond returns are promising almost double the yield of their US counterparts.

It makes sense why traders are drawn to this sector.

There’s already US$13 trillion in negatively yielding bonds. That is debt that you essentially pay the privilege of owning.

That, and many traders in the US are shunning the US corporate bond market because they’re aren’t convinced that American firms are going to be able to trade beyond the pandemic.

Despite the Federal Reserve Bank promising to buy up to US$500 billion in corporate bonds from May onwards, traders aren’t interested in them.

However, calling the Chinese corporate bond market a save haven is an utter farce.

Chinese corporate bonds carry far more risk because of government intervention.

I’d wager that China isn’t a safe haven destination.

Rather, it’s a trade that Wall Street needs to make. Portfolios have been hit hard. Bond traders must stick their money somewhere.

And right now, the murky Chinese corporate bond market is offering a bigger payday than the US market. With, on the surface, seemingly little risk…

The hunt for a return at any cost is ramping up. Traders are now delving into one of the riskiest sections of the global financial system.

It’s not so much that traders and Wall Street believe in the Chinese economic miracle.

Rather, they believe in themselves that they can get out of the market before they get caught out.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia


PS: Market expert Shae Russell predicts five knock-on effects of the recent market crash that could be even bigger threats to the average investor’s wealth than the crash itself. Click here to learn more.