A staggering 56% of Chinese firms enjoy an AAA-rating versus only 6% in the US thanks partly to large scale issuance by Chinese state-owned companies. Suspicion over these ratings has resulted in only a 3% holding by foreign investors. However, the first ever bond default in China in 2014 unleashed series of further defaults, defining a new dynamic in the local bond market – implicit government bailouts are no longer a given. This process has accelerated with 4 private firms recently defaulting at once. More market based ways to rate bonds can now be used, which this article suggests is a step towards market development.
Why does this matter? The recent surge in defaults could reveal the true health of the economy, potentially leading to repricing at significantly lower values. Moreover, the wider use of market pricing for credit could introduce more contagion across bonds, which could accelerate the default cycle.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)
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