Who could have seen this coming?
After weeks of 'calm' – demanded by The People's Party – and well-managed 'National Team' ramps top 'prove' how much Xi's plan for the nesxt five years is being received, the end of China's National Congress has been met with… a plunge in stock and bond markets.
This is the biggest drop in the Chinese market in 11 weeks…
But it's not just stocks. The Chinese bond market is getting slammed…
China 10Y yield is up 6 days in a row (the biggest surge in rates since May) to their highest since Oct 2014…
With the Chinese yield curve now inverted for 10 straight days – the longest period of inversion ever…
As Bloomberg reports, the situation that’s existed for most of 2017 – sovereign yields rising, and corporate debt remaining relatively resilient – is at risk of cracking. As appetite for bonds of any kind dwindles and authorities roll out measures that target higher-risk investments, company securities are in the line of fire.
Now that the Communist Party Congress is over, China’s bond holders may be about to get hit by “daggers falling from the sky," said Huachuang Securities Co., referring to aggressive deleveraging policies.
“It’s very likely we will see a significant increase in corporate yields in the coming year," said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai.
"The trigger could be tougher regulations or a default. A majority of non-bank financial institutions’ debt holdings are corporate bonds, so their selloff can lead to severe consequences. Banks are underestimating authorities’ intentions to tighten regulations.”
“The deleveraging campaign hasn’t even gone half way, and the risk of banks redeeming entrusted funds could surface at the end of this year," said Qin Han, chief bond analyst at Guotai Junan Securities Co. in Shanghai.
"The chance of a selloff in corporate bonds is increasing, which will result in a widening of their yield premium over sovereign notes."
But this is far from over, as we noted earlier, the end of China's National Congres is also ushering in the end of 'coordinated global growth'…
As Citi writes, "China’s Party Congress has concluded and Xi Jinping’s position as President has been consolidated. Given there are no standing committee members in their 50s, it suggests there are no apparent heirs for Mr. Xi, opening the door for him to stay on beyond 2022. One of the key questions in the run up to the congress was that once power was consolidated, would China accelerate its economic reforms. We think this is unlikely but do expect a moderation of growth, with data momentum perhaps set to continue to slow at its current pace. Note how China’s MCI tends to lead Citi’s macro data index for China and our MCI is still tightening."
It gets worse.
As Capital Economics writes in its China Activity Monitor note this week, the firm's China Activity Proxy (CAP) suggests that growth in China slowed last month to the weakest pace in a year and with property sales cooling and officials continuing their efforts to rein in financial risks, Cap Econ thinks that looking ahead "the economy will slow further over the coming quarters."
CapEco's ominous conclusion:
Looking ahead, we think growth will continue to slow over the coming quarters. The current props to growth appear shaky. With investment contracting in real terms, industrial output will probably soften over the months ahead. Property sales also look set to weaken further as the government’s purchase curbs continue to expand. This will weigh on construction before long. More generally, with tighter monetary conditions weighing on credit growth, activity looks set to weaken further.
That the past 18 months of coordinated global growth will end in China, is quite symmetric: back in January 2016, as global markets were tumbling, aborting the Fed's plans to hike rates 4 times in 2016 and resulting in sharp economic slowdowns around the globe, it was the (still mysterious) Shanghai Accord that "saved" the world, and unleashed a burst of unprecedented, and coordinated, growth… which only cost China some $8 trillion in debt.
It will only make sense that another major Chinese event will mark the top of this economic mini cycle, and lead to the next global downturn, not to mention spike in market volatility.
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