Opinion

What bond markets tell about China’s economy

Macro data doesn’t provide a comprehensive picture to investors, but bond issuance data can fill in some gaps.

By: and Date: July 10, 2019 Topic: Global Economics & Governance

There is no doubt that China macro data has some drawbacks and needs to be complemented. One great source of information is China’s increasingly large and liquid bond markets, both onshore and offshore. Here are some takeaways on China’s economic activity, private credit and capital flows.

On economic activity, first, the massive increase in onshore bond issuance is a very good signal of how much credit is flowing into the economy as a consequence of the government push for stimulus. The irony, though, is that it is mainly the public sector, either state-owned enterprises (SOEs) or local governments or their financial vehicles (LGFVs) instead of private firms, which are issuing debt. This might be explained by a “reverse crowding out” that might be occurring in China’s banking sector, as a consequence of the People’s Bank of China’s push for banks to lend to the private sector, which pushes SOEs and LGFVs to the bond market as funding source.

From a sectoral view, one-fifth of the onshore bond issuance, once government bonds are excluded, goes to the real estate and/or infrastructure sector. In reality, most of the activity is in the shantytown renovation, following the government’s policies. This explains the much faster pick-up in property investment compared with infrastructure and certainly not market forces. That said, the Chinese government may realize the infrastructure push solely relying on the public sector may not be sufficient to buffer the economic slowdown. In that regard, bond issuance by the private sector may actually increase in the second part of the year.

As regards private credit, one more interesting point to be made looking at bond-issuance data is that high-yield private firms have hardly issued onshore. Instead, they continue with their active issuance in the offshore US-dollar bond market. In other words, riskier Chinese firms are piling up external debt, a good part of which is swapped back for onshore usage, even if the funding cost is clearly higher than onshore. This can only be explained by the scarcity of funding for the private sector (especially high-yield issues) in China.

Finally, some takeaways can be drawn on China’s capital flows based on offshore bond data. Namely, and despite the surge in the offshore bond issuance by private firms, overall issuance fell substantially in Q1 2019. This trend is inconsistent with a potential need for further capital inflows in the light of a structurally weaker current account surplus and trade tensions with the US. In other words, more offshore issuance, as long as proceeds are brought back to onshore, should be welcome.

This is why we expect a much better second part of the year, in terms of offshore issuance, which will be further supported by a dovish US Federal Reserve. This is especially the case if the PBOC keeps the current policy of yuan stabilization. The need for such self-driven inflows is especially important at a time when foreign investors seem to be much more reluctant to enter China after a boom period since mid-2017. In fact, the share of foreign investors in onshore bond market plateaued in Q1 2019 notwithstanding China’s entry into the Bloomberg-Barclays index.

All in all, with external risks and domestic pressure on consumption, the bond market is really acting as a key source of funding to stabilize the economy but much more for the public than the private sector. In addition, real-estate and infrastructure investment seems to be behind a good deal of the issuance onshore, in line with the government support to these sectors to generate growth. In other words, China is back to a quick fix for growth rather than increasing productivity. Finally, the lackluster offshore bond market during the first quarter of 2019 is bound to improve as the pressure to boost capital inflows rises.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

Grading the big pandemic test

COVID-19 almost one year on, it is time to assess who passed the test, and who failed.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: November 27, 2020
Read article More on this topic
 

Blog Post

Europe is losing competitiveness in global value chains while China surges

The European Union owes much of its economic weight to its regional value chain and integration into the global value chain. But the EU’s global value chain role is shrinking, and while EU trade integration with China is increasing, it is mainly to China’s benefit, undermining the EU’s external competitiveness.

By: Alicia García-Herrero and David Martínez Turégano Topic: Global Economics & Governance Date: November 27, 2020
Read about event More on this topic
 

Past Event

Past Event

How to keep a competitive environment while engaging with non market economies?

How can we ensure fair competition between European firms and Chinese state-backed players?

Speakers: Julia Anderson, Helge Berger, Michiel Boots, Alicia García-Herrero, Carles Esteva Mosso, Frédéric Jenny, Georgios Petropoulos, Cian Ruane, Hylke Vandenbussche and Guntram B. Wolff Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 19, 2020
Read article More by this author
 

Podcast

Podcast

Sizing up the world's largest trade deal

What should be Europe's strategy towards the Regional Comprehensive Economic Partnership (RCEP)?

By: The Sound of Economics Topic: Global Economics & Governance Date: November 18, 2020
Read article More on this topic More by this author
 

Opinion

RCEP might not stop reshuffling of Asian value chains

China is no doubt bound to benefit, but other members of the regional trade pact may benefit even more

By: Alicia García-Herrero Topic: Global Economics & Governance Date: November 17, 2020
Read article More on this topic More by this author
 

Blog Post

Not all foreign investment is welcome in Europe

A new plan to tackle foreign subsidies would empower the European Commission to investigate foreign investments in the European Union, with Chinese investment particularly in the spotlight. This increased scrutiny could deter some investors. Overall however, fairer competition is worth some lost opportunities.

By: Julia Anderson Topic: Global Economics & Governance Date: November 10, 2020
Read article Download PDF More on this topic
 

External Publication

Hong Kong’s Intermediary Role on Funding the BRI: How does it fare against Singapore?

A look into the intermediary role of Hong Kong in financing cross-border Belt and Road Initiative projects and compare it with Singapore, a similar offshore financial center and competitor.

By: Alicia García-Herrero, Gary Ng and Hanrui LI Topic: Global Economics & Governance Date: November 4, 2020
Read article More on this topic More by this author
 

Opinion

Fifth Plenum maps China’s response to a more hostile world

'The Communist Party has acknowledged that the outside world now is more of a risk than an opportunity.'

By: Alicia García-Herrero Topic: Global Economics & Governance Date: November 3, 2020
Read article More on this topic More by this author
 

Opinion

China's yuan nowhere near cracking US dollar hegemony

For all Beijing's ambitions of cracking the hegemony of the US dollar in the face of Trump administration sanctions, the yuan still has a long way to go.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 30, 2020
Read article More on this topic More by this author
 

Opinion

Globalisation needs rebuilding, not just repair

An attempt merely to restore the pre-Trump status quo would fail to address major challenges; the task ahead is one of rebuilding, rather than repair. It should start with a clear identification of the problems that the international system must tackle.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 29, 2020
Read article More on this topic
 

Opinion

Politics, not economics, demands a strengthened international role for the euro

Not just the EU but also other countries, particularly China, need a defence against weaponisation of the dollar.

By: Alicia García-Herrero and Federico Steinberg Topic: European Macroeconomics & Governance Date: October 28, 2020
Read article More on this topic More by this author
 

Opinion

ECFA重要性遞減 台灣出口未來關鍵 在保持科技優勢和出口多元化

從地緣政治角度來看,ECFA自動延續無疑是個好消息,但協議對台灣經濟的直接影響較過去變得有限。雖然台灣對中國大陸的出口仍然重要,但ECFA占整體出口的重要性因資通訊科技產業快速發展而縮小。由於台灣在全球製造業供應鏈遷移和價值鏈重組中占有重要位置,未來對美國和東南亞出口預計將會加速。

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 20, 2020
Load more posts