China’s financial stability concerns are back in headlines, but the near-term growth outlook remains unfazed.
“Peak growth” and “peak optimism” storylines appear to be “the flavor of the month”, so any development that can confirm or challenge this view is closely watched – especially when it affects two major global growth drivers, the U.S. and China. The next week’s meeting of the U.S. Federal Reserve is a must-watch as regards monetary policy guidance (the Fed Fund Futures place the first rate hike 20-22 months from now). On the fiscal front, there is a great deal of uncertainty ahead of a Senate vote on the bipartisan infrastructure bill.
China’s growth outlook looks solid – there were no changes in the 2021 consensus forecast as of this morning – but the latest twist in the Evergrande saga (several Hong Kong banks halting some Evergrande mortgages) gave rise to another round of concerns about contagion and financial stability. The market fallout from the company’s seemingly never-ending liquidity crisis is limited for now, with China’s major equity indices and the currency being up in today’s trade. Government bond yields were mostly tighter, as should be expected due to their “safer haven” status.
China’s financial stability concerns are not new – a big spike in corporate/SOE1defaults (see chart below) rattled the market earlier this year. There were fewer defaults in the past couple of months (according to Bloomberg LP), but many analysts worry the drop might be temporary because (a) there were no material changes in the government’s approach to the public sector deleveraging, and (b) property developers have big presence on the offshore bond market. This is the reason why the Evergrande story demands full attention, so stay tuned.
Charts at a Glance: China Corporate Defaults – Which Way to Go?
Source: Bloomberg LP
1State-owned enterprise (SOE) – A legal entity that is created by a government in order to partake in commercial activities on the government's behalf.