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Chinese Credit Update

15 December 2020 by jbchevrel

Today Asian high-grade CDS grinded tighter another half bp to reach the recent tights [iTraxx Asia Ex Japan s34 = 58bp]. Chinese data overnight was solid [as of Nov: Retail Sales +5% Industrial Production +7% Property invt +7% Surveyed Joblessness 5%]. China CDS 28 [-0.5] at the tights, too. Meanwhile, we are seeing defaults in the Chinese corporate bond market [world #2 biggest] including some of companies which were thought of as low-risk [either state-backed or highly-rated]. Interestingly today, the Chinese authorities have suspended one of the top credit rating agencies after a former executive was accused of taking ‘massive’ bribes [for boosting the ratings of the issuers, of course]. Golden Credit Rating license is temporarily frozen and cannot take on new business for 3 months. This comes as Shandong Ruyi [China’s largest textile manufacturer] defaulted on $153M [equivalent] on Monday and another $153M [equivalent] Tuesday. Shandong Ruyi had quickly piled up debt [more than $4B equivalent] in order to make international acquisitions [The Lycra Company, Gieves & Hawkes]. The Chinese regulators are also investigating China Chengxin [another big rating agency] after the mining company Yongcheng defaulted last month [Yongcheng was AAA on default day at this agency]. Chinese authorities try to break the implicit government guarantee debt without triggering anything systemic, so we may see more such onshore defaults. Foreign investors are not heavily exposed to these Chinese corporates. Rather, they have increased their holdings of CGBs and banks debt up to record levels for some. That said, these defaults question the ability of local governments to support companies and can, in fine, argue against taking exposure in China.