“Domestic debt has long been an issue for the Chinese economy. But one particular corner of the debt market—dollar-denominated debt issued by Chinese companies—looks increasingly in danger of collapse.
“Several factors are contributing to the rising risk of default. Rising interest rates, a declining Chinese currency, the ongoing U.S.–China trade dispute, and fast-approaching maturities are causing experts to sound the alarm.
““We will be talking about a major financial crisis—a dollar debt crisis,” Daiwa Capital Markets’ Kevin Lai told the South China Morning Post. Lai is the securities firm’s chief economist for Asia (excluding Japan).
“There’s $3 trillion in outstanding dollar-denominated debt issued by Chinese companies, Daiwa estimates; most was issued by subsidiaries of Chinese companies in Singapore or Hong Kong…
“Nomura expects more defaults going forward “against a backdrop of weakening domestic demand, rising credit defaults, a depreciating RMB and Fed rate hikes.”
“…refinancing, which is likely the only option for most developers besides defaulting, has become increasingly difficult and costly.
“In past years, property developers were able to tap into funding through the shadow banking industry. But recent crackdowns by Beijing have eliminated most options there.
“Capital market funding costs have gone up in recent issuances. Bloomberg data has shown that yields on Chinese below-investment-grade borrowers have reached 4-year highs. Last week, Times China Holdings Ltd. and Hengda Real Estate Group Co. both priced two-year dollar offerings at an eye-wateringly high rate of 11 percent.”
“The Chinese government has intervened heavily in the economy in order to soften the effects of weakening growth and industrial activity.
“Investors are trying to figure out how much of that intervention has been helpful to the economy over the medium term and how much of it simply allowed domestic firms to become more indebted and even less productive or competitive.”
“Chinese iron ore futures tumbled nearly 6 percent and steel prices dropped to the lowest in almost five months on Monday as worries over weaker steel demand sustained a selloff…
“…raw materials like coking coal and coal also down sharply.”
“China’s car market, the world’s largest, is on the brink of its first sales contraction in almost three decades, according to industry data, a signal of wider economic strains that are rattling the country’s leaders in Beijing… China has long hoped to spur consumption in these provincial cities as a way of diversifying an economy long reliant on manufacturing. But a slump in consumption spending is already being seen in things like cinema ticket sales, online shopping and smartphones purchases.”
“Lower sales growth and higher costs will drag profitability down [for the Indian auto industry], which in any case has been trending lower in the past couple of years.
“No wonder then that the euphoria in automobile and component stocks has been ebbing in the recent past.”
“Asian refiners are already struggling to make any money producing gasoline, with the profit margin, or crack, for making a barrel of 92-octane from Brent crude in Singapore GL92-SIN-CRK at 32 cents on Nov. 23. With profits from gasoline currently tenuous, the scope for refiners to lower prices further is likely constrained.”
“Another collapse in the oil price late last week is sending worrying signals about the health of the global economy
“…with the picture for the commodity further clouded by supply and demand trends and the US President publicly backing lower prices.”
“Overseas bond sales by Indian companies have slumped to the lowest since the global financial crisis a decade ago…
“…illustrating uncomfortable levels of volatility in global rates and currency markets this year.”
“A mega-trial harking back to the dark years of Spain’s economic crisis kicks off Monday over the alleged fraudulent 2011 listing of financial giant Bankia, with former IMF leader Rodrigo Rato in the dock. The Spanish state was forced to step in to prevent the bank’s collapse and then to borrow 41 billion euros from the EU to keep Spain’s banking sector afloat. The 69-year-old Rato, head of the bank at the time, is accused of falsifying the books and fraud to the detriment of investors.”
“Rising bond yields in Italy could eventually hurt the economy as banks could be discouraged from lending, European Central Bank supervisor Daniele Nouy told a newspaper on Saturday… Italian banks, which hold billions of euros worth of government debt, are suffering because the widening spread with the German bunds reduces the value of their bond holdings, increasing the risk of capital shortfalls.”
“It is not “remotely possible” that U.K. Prime Minister Theresa May’s Brexit withdrawal agreement would pass the House of Commons, which is the lower house of Parliament, in a crucial vote that will likely take place in December, a member of Parliament said on Monday.”
“May needs a simple majority of the 650 lawmakers in the House of Commons, but experts have indicated it will be an uphill task for the prime minister. Her Conservative Party holds 315 seats and represents the largest party in the House, but a significant number are against the plan, including some pro-Brexit members. Meanwhile, lawmakers in the opposition have mostly indicated that they will vote against the deal.”