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
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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