Is It Time To Start Worrying About China’s Debt Default Avalanche? by Tyler Durden

The short answer is yes. From Tyler Durden at zerohedge.com:

With Bank of America reporting that US corporate leverage just hit a fresh all time high…

and with both Moody‘s and various restructuring bankers warning that the bond party is almost over, there is a distinct smell of corporate crisis in the air.

But what if the first domino to fall in the coming corporate debt crisis is not in the US, but in China?

After all, as part of China’s aggressive deleveraging campaign, there has already been a spike of corporate bankruptcies as banks shed more of their massive note holdings and de-risk their balance sheets. According to Logan Wright, Hong Kong-based director at research firm Rhodium Group LLC, there have already been least 14 corporate bond defaults in China in 2018; a separate analysis by Economic Information Daily, as of May 25, there had already been no less than 20 corporate defaults, involving more than 17 billion yuan, a shockingly high number for a country which until recently had never seen a single corporate bankruptcy, and a number which is set to increase as Chinese banks pull pull back from lending to other firms that use the funds to buy bonds, exacerbating the pressure on the market.

“You have seen banks redeeming funds placed with non-bank financial institutions that have reduced the pool of funds available for corporate bond investment overall,” Wright told Bloomberg, adding that additional bond defaults are especially likely among those property developers and local-government financing vehicles which have relied on shadow banking sources of funds.

As we discussed last year, as part of Beijing’s crackdown on China’s $10 trillion shadow banking sector, strains have spread from high-yield trust products to corporate bonds as the lack of shadow funding has choked off refinancing for weaker borrowers. Separately, Banks’ lending to other financial firms, a common route for funds and securities brokers to add leverage for corporate bond investments, declined for three straight months, or a total of 1.7 trillion yuan ($265 billion), since January according to Bloomberg calculations.

To continue reading: Is It Time To Start Worrying About China’s Debt Default Avalanche?

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