In China, Signs of Financial Strain

Signals for corporate default risk, capital outflow point to credit-related stress.

adfcce

Market observers have long been worrying about the risk of a Chinese credit crunch. Now, two of Predata’s early warning signals of financial stress inside the PRC are elevated -- that for corporate default risk and capital outflow.

Predata’s predictive signal for Chinese corporate bond default risk is elevated, now at its highest level in 110 days, suggesting more defaults may be in the offing over the next month.

caeacd

The combination of a slowing economy, a stronger dollar, and a tightening Federal Reserve is putting pressure on indebted Chinese firms. In the last two months there were eight new defaults, compared to a total of 11 defaults between January and July of 2018. As the latest example, on Friday, mainland Chinese developer Wuzhou International Holdings said it had missed 1.4 billion yuan ($204 million) in bond payments. In mid-September, Chinese conglomerate HNA defaulted on a 300 million yuan ($44 million) loan raised through Hunan Trust, which moved to freeze some HNA assets. Of the four so-called “grey rhinos” -- a Chinese language play on “black swans, the heavily indebted Chinese conglomerates HNA, Wanda, Anbang, and Fosun, whose failure could trigger a domestic financial crisis -- the level of digital concern for Fosun appears the highest.

In addition, capital outflow risk, as measured by a Predata signal (in red) that captures Chinese-language interest in web pages related to common outflow avenues, is at its highest level of the year. So is Predata’s Chinese language cryptocurrency signal (in blue), another proxy for Chinese capital outflow. The PBOC has been clamping down on cryptocurrency trading and initial coin offerings in China because virtual currency has been used as a vehicle for capital flight.

vfvf

On Sunday, the Peoples Bank of China released foreign exchange data for September, showing that foreign currency reserves fell by $23 billion. Sustained capital outflows put downward pressure on the yuan, and without intervention by the PBOC, the currency would depreciate further against the dollar.