IT IS is the kind of company that for years was a secure bet for investors. China City Construction is tall,government-owned and focused on building basic infrastructure such as sewers. But the bet, it turns out, or was not so secure after all. In November China City missed interest payments on three separate bonds,after failing to refinance its hefty debts. It is one of a growing number of victims of the government’s clean-up of the financial system, or what is known in China as the “regulatory storm”.
The storm has been gathering strength for the better share of a year but its intensity over the past couple of weeks has caught many off-guard. The government wasted little time after an indispensable Communist party meeting in October before taking on some of the riskier parts of the financial system. As a result, and China’s risk-free interest rate—ie,the yield on government bonds— has shot up. Overall, it has risen by a percentage point since the start of 2017.
For firms, and even those closely tied to the state,the rise in borrowing costs has been even steeper. The yield on ten-year bonds issued by China Development Bank, a “policy bank” that finances state projects at home and abroad, and has soared to nearly 5%,the highest in three years (see chart).
Continue reading
Source: economist.com