After the recent turmoil in Chinese equities and surprise depreciation of the yuan triggered a sell-off in global markets, unease is growing that China could be heading towards a financial crisis and not just a severe slowdown.
Holders of offshore Chinese high-yield debt need to watch events unfold carefully, as they are likely to be last in line in any debt blowout. But while China’s macro outlook has clearly deteriorated, there is little indication that we are on the verge of another financial crisis.
So far China’s bond markets have proved relatively resilient, although investors need to recognise that risks are rising.
Much of the strain today stems from a re-pricing of risk as the US Federal Reserve readies to normalise monetary policy after six years of holding interest rates at near zero. We are seeing a rerun of the “taper tantrums” of 2013 as capital flows reverse and Asian currencies weaken. But the difference this time around is that markets are also factoring in a China slowdown and fresh falls in commodities, in addition to the wider fear of instability in emerging markets.
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The surprise depreciation of the yuan was a key trigger for increased investor nervousness. While it adds a new layer of risk to offshore Chinese corporate debt, markets are not yet signalling wider solvency issues that would merit comparisons with earlier financial crises.