At the moment the money market is calm and out of stress. In the past month money market rates have continued to edge lower and are now back at levels from before the money market stress started in June last year.
In the corporate bond market the yield spread for high quality corporate debt has narrowed substantially in the past month. However, yield-spreads for low quality corporate debt remains elevated at levels that must be considered stressed. This underscores that low quality corporate debt continues to face very difficult refinancing conditions.
Broad credit growth has slowed markedly over the past year driven by a substantial slowdown in shadow finance while growth in traditional bank loans have been relatively stable
Growth in shadow finance rebounded a bit in April driven solely by a surge in net corporate bond issuance (highest monthly net issuance ever). On the other hand new funding from trust funds has virtually dried out and entrusted loans (loan between companies) have also weakened. Entrusted loans appears to have replaced loans from trust fund as the most important source for higher risk loans.
The surge in corporate bond issuance in April is a tentative sign of improving investment demand particularly from major state owned companies. However, the sharp slowdown in other shadow finance sources underscores that credit event risk remains very high for companies dependent on funding from these sources particularly trust funds. This is particularly the case for smaller property developers that at the moment is also be squeezed by a slowing property market.
We still regard June as a major hurdle for Chinas financial markets as credit event risk will spike again and money market stress could possibly emerge again as in June last year. Liquidity is usually tight in end-June due to tax-payments, window-dressing by banks and many wealth management and trust products designed to expire by end-June for the same reason.
The Chinese government is still planning to introduce a deposit insurance at some stage in H2 14. This will reduce the likelihood of bank runs on smaller private banks and could allow the government to become more bold in its reforms and allow more defaults.
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