A lifeline for China’s local junk bonds is about to get cut, threatening financing for weaker companies already grappling with mounting defaults.
The People’s Bank of China is to include wealth management products that are held off bank balance sheets in its framework for gauging risk to the financial system starting in the first quarter of next year, a newspaper controlled by the central bank said on Monday.
The monitoring might drag on growth of wealth management products that banks authorize third-party asset managers to oversee so they can purchase riskier debt with leverage, according to money manager Shanghai Silver Leaf Investment Co Ltd (上海銀葉投資), which oversees about US$2 billion in assets.
Chinese lenders, the nation’s biggest bond investors, often rely on such arrangements to circumvent risk control rules. Regulators must walk a fine line in reining in investments made on borrowed money amid a broader rout in Chinese debt, after local note failures jumped four-fold this year.
That has heightened concern that any overreach could lead to panic selling, after steps to trim leverage in equities last year contributed to a US$5 trillion stock drop.
The outstanding value of wealth management products managed by third-parties was 3.46 trillion yuan (US$497.7 billion) as of Sept. 30, accounting for 13 percent of all such investments, according to research firm PY Standard.
About 50 percent of agricultural banks’ wealth management products were managed by third parties.
At least 28 onshore bonds have defaulted this year, compared with seven last year.
Bosera Asset Management Co Ltd (博時基金) said the number of note nonpayments might continue to rise substantially next year.
The central bank’s leverage cut has led to bond market turmoil this month.
The yield premium on seven-year “AA-” rated corporate bonds over government notes widened by about 49 basis points to 345 basis points, the fastest monthly increase since September 2014.
At least 102.8 billion yuan of bond sales have been canceled or postponed this month, compared with 29.7 billion yuan for all of last month, according to data compiled by Bloomberg.
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