China’s US dollar debt market showing cracks from US sanctions and prospect of more

If United States decides to block top Chinese firms from US dollar financings, everyone will have to stop trading their bonds immediately, analyst says

Chinese technology companies, banks and state-owned enterprises are key targets for American sanctions, affecting the price of their bonds in the Chinese corporate bond market

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The US State Department blacklisted six Chinese entities and two Chinese men this week for having dealt with Iranian shipping company Islamic Republic of Iran Shipping Lines, whose shipping containers are seen here at the Port of Hamburg in Germany. Photo: Shutterstock

Published: 5:50pm, 21 Oct 2020Updated: 10:40pm, 21 Oct 2020

As US-China tensions show no sign of abating, the threat of new Washington-imposed tariffs and sanctions on Chinese firms are starting to reveal cracks in China’s US dollar corporate bond market.

Since the Trump administration started the trade war with China in 2018, the United States has imposed tariffs on US$550 billion worth of Chinese products, while China has countered with tariffs on US$185 billion worth of American goods.

The Pentagon this year also designated 31 leading Chinese companies, including giant state-owned chemical companies Sinochem Group and China National Chemical Corp, or ChemChina, as “Communist Chinese military companies”. Separately, the US Commerce Department added 24 Chinese firms to its so-called Entity List that banned US firms from selling to them without special licenses, including construction giant China Communications Construction Corporation, for their role in building island outposts in the disputed South China Sea.

The US designations lay the groundwork for financial sanctions against these Chinese entities, forcing investors to weigh the choice of making money from China’s corporate bond market against the prospect of bond issuers being penalised by the US and suffering reputational damage, analysts said.

“If the US decides to block top Chinese corporates from dollar financings, then everyone will simply have to stop trading their bonds the very next day,” said Vivien Gui, who is in charge of fixed income investment at Wu Capital. “China hasn’t reached this kind of stage yet, but some traders are already asking what would be the point of buying some corporate bonds now?”