Corporate debt troubles China, bond market overtakes that of US

Updated: Monday June 23, 2014 MYT 6:54:09 AM

Corporate debt troubles China, bond market overtakes that of US


THE fact that China is financing a quarter to a third of its corporate debt of US$14.2 trillion at the end of last year, through the shadow banking sector, is a cause of concern.

“This means that as much as 10% of global corporate debt is exposed to the risk of a contraction in China’s informal banking sector,” Standard & Poor’s (S&P) said, estimating this at US$4 trillion to US$5 trillion.

“With China’s economy likely to grow at a nominal 10% per year over the next five years, this amount can only increase,” said the agency, as quoted by Reuters.

Of particular concern is China’s exposure to the property and steel sectors where higher land bank and inventory had led to sluggish property prices which, in turn, resulted in a decline in steel demand.

In fact, the Chinese bond market has overtaken that of the United States while the Asia-Pacific region, led by China, is seen accounting for half of global corporate debt financing needs of US$60 trillion over the five years to 2018, said S&P.

With increasing corporate risk that will have systemic effects, China should view its corporate debt sector with concern.

It should look hard at measures to control its corporate debt which should not be allowed to balloon out of proportion.

More rules are being hammered by US regulators targeted at mitigating taxpayers’ losses in the event of another financial crisis.

On top of the equity of 10% of their balance sheets that US banks now hold, they are bracing for another 10% in bonds of maturities exceeding one year and other instruments, said Reuters.

Regulators want creditors – and not just shareholders – to take a hit if a bank lands in trouble, to prevent a repeat of the panic that spread when Lehman Brothers collapsed in 2008.

The equity requirements that US banks already conform to are in line with recommendations made in the global Basel III accord, said Reuters.

The Fed has said it is planning similar requirements for long-term debt instruments that investors buy, knowing they might lose all or part of their money.

This would double the loss-absorbing capacity of a bank’s capital to about 20%, saidReuters.

It is a positive sign that the regulators are “using a microscope” to look into capital requirements in detail.

These preemptive measures indicate that they are leaving no stone unturned and are acting before it is too late.

The Fed is working on four more rules: to raise more capital for systemically important banks, to require banks to invest in assets they can easily sell, to balance the maturities of assets and liabilities, and to make the short-term funding market less susceptible to panic, said Reuters.

The European Banking Authority (EBA) is keeping tight control on banks’ bonus payments and not allowing any bank to go against the European Union bonus cap.

A new form of payment called bank allowances is being used by banks in Britain following the introduction of the bonus cap that limits bonus to 100% of salary or 200% with shareholders’ approval.

These allowances, paid monthly, are not tied to performance and so do not qualify as bonus,

“In general, these allowances, which are paid as fixed amounts in addition to the base salary, are considered by institutions as fixed remuneration,” the EBA said.

“However, these allowances are discretionary, as they are paid to selected members of staff and in most cases only for limited periods of time,” said the EBA, as quoted by Reuters.

“The EBA is currently analysing this emerging practice and will set guidance criteria to correctly assign these elements to either variable or fixed remuneration,” said the authority which has threatened to crack down on banks if these payments are found to be circumventing the EU bonus cap.

The EBA is focused on maintaining the EU bonus cap and is keeping an eagle eye on any bank that is suspected of trying to circumvent it.

That is understandable as they have a job to do to avoid a repeat of the previous financial crisis, which was sparked in part by greed for more and more bonus.

Banks are now on a steady recovery and the EBA would not want a restart of the credit bubble nightmare.

It appears that banks might have to look at other ways to make themselves more competitive.

Columnist Yap Leng Kuen hopes there will be more measures to control corporate debt.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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