China’s state planning agency announced that will start investigating the ability of corporate bond issuers to repay maturing bonds as details emerged of two more high profile borrowers missing investor payments.
China Minsheng Investment Group (CMI), and Wintime Energy have both missed bond repayments according to sources close to both companies.
Chinese defaults reached record numbers last year and is the latest sign that debt fuelled growth in the country could start having a negative impact on the state.
On the 12th February, the South China Morning Post reported that CMI as one of the biggest private investment groups still has not repaid bond holders money promised by February the 1st 2019, which was already a three day delay after a 3bn yuan private note matured on the 29th January.
Other private firms are facing default pressure this year as banks tighten and refuse loans.
Wintime Energy appeared to have missed an investor payment due on the 6th Feb that was a part of a restructured repayment plan, the coal mining company became one of the country’s largest corporate debt defaults when it collapsed last year on the weight of a quadrupled debt burden in less than 5 years. The company told investors that it was trying to source financing for 20% of the principle on the 3.8bn Yuan delinquent bond.
Both companies have been borrowed vast amounts previously and the financing struggles may be a sign of deeper issues within the 11 Trillion Dollar, Chinese Bond Market, and possibly the wider economy.
To the United States and concerns for economic health were raised by Paul Krugman in an interview with Bloomberg, he warned that recession in the United States as “pretty likely” further extending that to the global economy within the next two years. Krugman further said in the interview that he was not expecting a recession of the same impact as 2008. Krugman also criticized current US Treasury Secretary Mnunchin stating that he was “no Hank Paulson” and that “we (USA) are in much worse shape to deal with whatever shocks may come along than 10 years ago.” With reported higher public debt and less room for the Federal Reserve to lower interest rates, he may be right.
In the Eurozone new figures revealed that Germany barely officially avoided entering recession last year.
Europe’s biggest economy registered zero growth in Q4 last year; this is made only slightly better by the country avoiding two successive quarters of contraction.
Slowdowns in consumer spending, business investment and exports all contributed to Germany’s flat line growth. Domestic car sales have dipped and the movement of goods was markedly short.
It is worth considering that Germany is the largest economy in Europe and came very close to recession on the zero growth announcements, which could be an indication of the global economy possibly slowing down further than the economists and Central Banks are allowing?
The prediction for growth in Germany this year has been downgraded from 1.5% to 1% for 2019 and if President Trumps threats of heavy tariffs on European cars is realised, it could accentuate the situational slow down and impede growth further.
A possible positive development from the US administration is the trade talks with China. President Trump told reporters that he was willing to push back the March 1st deadline on raising tariffs for Chinese imports, so long as the two countries can get close to a deal in the ongoing negotiations.
With the US trade delegation scheduled to start talks on Friday and Trumps apparent olive branch, there may be a glimmer of hope that the looming threat of an escalation to the Trade war between the world’s two largest economies might be avoided.
Trump did also say that it is up to Beijing to firm up a deal that is to include, deeper structural economic reform to the Chinese state driven economy, to thus protect United States competitors. Otherwise he will push ahead with raising tariffs from 10% to 25% on 200bn worth of Chinese imported goods.
It is to be noted that Washington has managed to secure Key concessions in previous rounds of talks, including commitments from the Chinese to purchase more US goods to move towards levelling out trade disparity over time, but contentious issues still remain. America’s accusations of corporate IP theft by the Chinese and demand for scaling back of industrial subsidies are two that are prominent.
The financial markets have been subdued of late by the ongoing clash of US-Chinese economic power houses, which is apparent by the seemingly lack of larger institutional investment in the marketplace.
Traders will be waiting for updates in this latest round of talks, so it would be expected that any news will provide some volatility to the market again and we may see the larger money flow through both the currency and stock market.
Chinese corporate growth had been facilitated by cheap and accessible credit that was until Beijing initiated a deleveraging campaign last year, which sparked a liquidity crunch and saw shadow bank lending fall to two year lows. Combine this with a slowing economy and Beijing appears to be worried, the government has already taken steps to try and offset the deleveraging fallout with cash injections and stimulus projects, but the effect has been uneven.
Will the state’s intervention of investigating company bond capabilities stem the tide of corporate bankruptcies? How will this play out in the global market?
