rtmark
LearnBonds.com

Bank Seizure Sees Chinese Bond Traders Reassess Counterparties

China stock market

Counterparty risks are being looked at in a completely different light by Chinese bond traders following the seizure of Baoshang Bank Co. by the Chinese government. Traders are rightfully unwilling to touch even premier, AAA rated bank short-term bank debt as security due to the seizure of the bank last month.

Corporate bonds that do not have Chinese sovereign bills or policy bank notes as pledges simply aren’t being considered. This is, in turn, causing China’s financial institutions to become mired in problems with funding being clogged up and has already caused borrowing costs to massively spike for brokerages and smaller banks.

Bad timing of seizure could lead to increased defaults

The timing of these problems is particularly bad due to lowered liquidity in the current market, with higher defaults being a very real possibility if any more ramifications come from the Baoshang Bank Co. Seizure.

David Qu, who is an analyst at Bloomberg Economics and is based in Hong Kong, says that the biggest buyers of corporate bonds in China are actually non-bank financial institutions. If the funding chain for these non-bank financial institutions breaks, this will hurt them a lot, particularly those who are not able to pledge for borrowing. Weaker companies will get hurt by the rising cost of selling new bonds and this will lead to much higher default numbers.

One trader at a Beijing brokerage, who asked to remain anonymous, said that the brokerage’s counterparty has just tightened the screws on collateral for repo lending. Whereas earlier AA+ debt was acceptable, now it is only willing to accept AAA debt, and even then it has to be in the form of negotiable certificates of deposits. Other traders in the industry have been saying that many counterparties are now only accepting government bonds as collateral and this is hurting bond trading.

Liquidity in the financial market could be hurt long term

China has a very specific way of funding. Large national banks lend to smaller regional banks. These smaller regional lenders then provide financing services to brokerages and funds. Those, in turn, use the money they borrowed to invest in corporate bonds and in effect keep the wheel of the economy spinning.

According to Ming Ming, who is the chief fixed-income analyst at Citic Securities Co., the smaller banks in China play a crucial role in this process and with investors feeling increasingly risk-averse and wanting to mitigate counter-party risk this could lead to some bank times for China’s financial system. It could, in fact, lead to a complete collapse of the liquidity of the Chinese financial market which would have impacts far beyond its own borders.

Authorities int he country have held talks with brokerages to discuss the risks that are clearly present to liquidity in the market currently. The seven-day and 14-day repo rates soared to an excessive 15% – far too high according to many traders in the industry. The key problem is that despite the central bank having injected liquidity into the market, it has only really benefitted big banks and not the smaller ones.

Trusted & Regulated Stock & CFD Brokers

What we like

  • 0% Fees on Stocks
  • 5000+ Stocks, ETFs and other Markets
  • Accepts Paypal Deposits

Min Deposit

$200

Charge per Trade

Zero Commission

Rating

64 traders signed up today

Visit Now

75% of investors lose money when trading CFDs.

Available Assets

  • Total Number of Stocks & Shares5000+
  • US Stocks
  • German Stocks
  • UK Stocks
  • European
  • ETF Stocks
  • IPO
  • Funds
  • Bonds
  • Options
  • Futures
  • CFDs
  • Crypto

Charge per Trade

  • FTSE 100 Zero Commission
  • NASDAQ Zero Commission
  • DAX Zero Commission
  • Facebook Zero Commission
  • Alphabet Zero Commission
  • Tesla Zero Commission
  • Apple Zero Commission
  • Microsoft Zero Commission

Deposit Method

  • Wire Transfer
  • Credit Cards
  • Bank Account
  • Paypall
  • Skrill
  • Neteller

What we like

  • Sign up today and get $5 free
  • Fractals Available
  • Paypal Available

Min Deposit

$0

Charge per Trade

$1 to $9 PCM

Rating

Visit Now

Investing in financial markets carries risk, you have the potential to lose your total investment.

Available Assets

  • Total Number of Shares999
  • US Stocks
  • German Stocks
  • UK Stocks
  • European Stocks
  • EFTs
  • IPOs
  • Funds
  • Bonds
  • Options
  • Futures
  • CFDs
  • Crypto

Charge per Trade

  • FTSE 100 $1 - $9 per month
  • NASDAQ $1 - $9 per month
  • DAX $1 - $9 per month
  • Facebook $1 - $9 per month
  • Alphabet $1 - $9 per month
  • Telsa $1 - $9 per month
  • Apple $1 - $9 per month
  • Microsoft $1 - $9 per month

Deposit Method

  • Wire Transfer
  • Credit Cards
  • Bank Account
All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
Ali Raza

A journalist, with experience in web journalism and marketing. Ali holds a master degree in finance and enjoys writing about cryptocurrencies and fintech. Ali’s work has been published on a number of cryptocurrency publications.