China Is Deleveraging: Invesco and Aberdeen Expect Bond Market Correction to Continue 1

Banks in China continue to pull away from entrusted investments

Entrusted investments (as explained in Part 1) have reached a whopping $1.7 trillion in China (FXI) (YINN). And critics are now increasingly blaming this schema for adding excess leverage while reducing transparency in China’s (YANG) (FXP) (CHAD) financial system. As part of its regulatory crackdown to remove systemic risk from China’s financial system, the China Banking Regulatory Commission (or CBRC) has asked banks to report the scale of their entrusted investments by June 12 and to rectify any irregularities by November 30. This has triggered a bond market correction in China.

Bond market correction: yields are at their highest in 2 years, as prices take a nose dive

China is deleveraging, and banks in China are increasingly pulling out of these funds leading to a bond market correction. China’s capital market is currently witnessing outflows, especially in the bond market, as a larger share of these funds are invested in bonds, as opposed to the stock market. Consequently, bond market yields in China are nearly at their highest in two years (chart above), as prices take a nose dive.

Invesco & Aberdeen expect bond market pressure to continue

Going ahead, we expect the pressure on the bond market to continue, as more and more financial institutions in China fall under the regulatory ax.

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Ken Hu, CIO of Asia-Pacific fixed income at Invesco Hong Kong Ltd. expects corporate bond yields to continue to rise as default rates in China will possibly increase for the next six to 12 months. Edmund Goh, fixed-income investment manager at Aberdeen Asset Management Plc says, “There’s a lot more room to correct.”

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