Policies Will Prevent Default Contagion

There's much greater calm in the bond market this year versus 2016. That's because 2016 was the tail end of a prior credit slowdown and various problems such as a depreciating yuan, weaker GDP growth, falling commodity and stock prices worldwide, particularly plunging crude oil prices, were all manifest at the start of that year.

JRJ: 债券:最近违约有点多 多管齐下避免风险扩散
Policies to Avoid Risk Diffusion

It should be said that breach of contract is not terrible, and breach of contract is a situation that the bond market will have to face in order to mature, and it is a "growing upset." However, intensive breaches of contract, especially unordered defaults, should be vigilant and need to be addressed.

Industry insiders warned that defaults triggered by refinancing risks are characterized by poor predictability and suddenness, and may have a more significant impact on the market. Once negative opinion arises, it may lead to a drastic deterioration of the corporate financing environment. At the same time, when the market risk identification capability is not strong, market risk investors tend to have a “one size fits all” tendency when dealing with specific types of issuers. All of these make it easy to form a vicious circle between "financing contraction - credit default." And if letting credit default goes to a vicious circle, it may evolve into a large area of ​​credit risk, triggering liquidity risk, or even systemic financial risk. This requires the decisive action of the regulatory authorities, cutting off the chain of vicious circles and avoiding the deterioration of the situation.

The relevant departments have already noticed this and are already in action. On June 1st, the Central Bank announced that it would expand the scope of MLF collateral to a level not lower than AA grades of small and micro enterprises, green and “three rural” financial bonds , AA+, AA grade corporate credit bonds, and high quality micro and small corporate loans. Green loans are included in the MLF collateral. On the 6th, the central bank over-scheduled to maturity MLF, releasing the incremental medium-term liquidity of 203.5 billion yuan. While announcing the adjustment of the scope of MFL collaterals and the implementation of MLF operations, the central bank has expressed that it will further increase support for small and micro enterprises, green economy and other areas, and promote the healthy development of the credit bond market. The intention of the central bank to direct capital flow to small and micro enterprises and credit bonds, and restore the normal financing function of the bond market is obvious.

In addition, the China Banking Regulatory Commission recently issued the " Measures for the Administration of Joint Credit Granting of Banking Financial Institutions (Trial)". Analysts pointed out that the significance of this policy is to limit the excessive supply of credit to some companies on the one hand, and thus to make room for other financing entities. On the other hand, joint credit grants may help ease the lending of single banks to corporate finances. The impact has certain positive significance for stabilizing the corporate financing environment.

Whether it is the increase of liquidity or the release of support signals through various structural policies, it will have some advantages in relieving the current excessive tension of credit bonds.

However, many market viewpoints hold that the decline in market risk appetite is unlikely to change significantly at one time. Whether bank institutions will actually increase the allocation of medium-to-low-grade credit bonds remains uncertain. The actual effect of these policies remains to be seen. From a longer period of time, the process of revaluation of credit risk is already open and it is difficult to reverse. Default risk premium will gradually return to a reasonable level, and the level spread will gradually expand. The internal differentiation of credit bonds is the trend. Investors should remain cautious in the face of low-grade bonds, and the process of risk-free release is over.

It should also be noted that even if there is an increase in defaults this year, the overall default rate of China's credit bond market is still at a very low level, and credit risk is generally low. Supported by sound economic fundamentals, credit risk does not exist on a significant basis. If irrational adjustments occur in the market, especially if high-quality bonds are hit by mistakes, they may bring about certain opportunities. At the moment, credit debt is at stake, and doing a good job of risk identification and ticket selection will be the key to investment success.

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