NewData shows weakening hopes in China meeting growth targets

Waning investor confidence about China's economy hitting year-end growth targets is showing in the country's credit markets and money supply data as an 11-week stock market slump, sudden yuan devaluation and an impending rise in United States interest rates take their toll.

Early warning signs of a financial system's failing health and a widening credit spread reflect investor concerns that default rates may pick up. Frequent capital injections into the market by the People's Bank of China, as has happened repeatedly in recent months, on the other hand suggest tight liquidity and capital outflows.

"Large parts of the Chinese economy are severally struggling. Parts are doing well and parts aren't, and credit spreads are starting to reflect that," said Michael Every, the head of financial markets research at Rabobank.

Equity market volatility hit a four-year high last week with the spread on some investment-grade credits spiking at levels not seen since the taper tantrum in mid-2013, when the US Federal Reserve announced it would start paring US bond buying - a programme set up in the wake of the financial crisis to help lower borrowing costs.

A measurement of Asian corporate bond spreads, including offshore Chinese debt, the Markit iTraxx Asia ex-Japan index, reached 141 basis points, the highest level since March last year, while the JP Morgan Asian Spread Index, surged 306 basis points, its biggest move since December.

One reason for the widening spreads on offshore US-dollar-denominated Chinese debt is last month's yuan devaluation, which raised debt repayment costs for Chinese companies reliant on yuan earnings.

The PBOC says it now references market forces when setting the daily mid price, against which the yuan can trade up or down 2 per cent. But for every 1 per cent the yuan weakens against the dollar, Chinese bond issuers need to cough up an extra US$10 billion in coupon payments, according to analysis by BMI Research.