Financial Risk in China: Same Old Emerging Market Risk

China faces debt crunch as property values fall
One Hong Kong-based hedge fund has accumulated the prospectuses of no fewer than 250 of the trust companies that sit at the heart of the Chinese shadow banking system. These contain virtually no disclosure except on the value of the real estate that backs loans whether committed or proposed.

Meanwhile, interest rates are high. The average lending rate in September was 6.97 per cent, and the real, one-year interest rate is now 4.3 per cent – a five-year record. Moreover, the real burden of debt is becoming heavier because of deflation. Upstream producer prices have been in deflationary territory for 32 months now.

Foreign borrowings are also problematic. Chinese companies have become the largest issuers in the US dollar high yield market, having raised over $180bn in US dollar-denominated debt, according to research from Morgan Stanley.

...Moreover, the burden of repaying foreign debt without foreign revenues is growing since few borrowers anticipated the relative strength of the dollar against the renminbi.

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