What bond markets tell us on China’s economy?

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow; Gary Ng, Natixis Asia Pacific Economist, Sectoral Research.

There is no doubt that China macro data has some drawbacks and needs to be complemented. One great source of information is China’s increasingly large and liquid bond markets, both onshore and offshore. Here are some takeaways on China’s economic activity, private credit and capital flows.

On economic activity, first, the massive increase in onshore bond issuance is a very good signal of how much credit is flowing into the economy as a consequence of the government push for stimulus. The irony, though, is that it is mainly the public sector, either state-owned companies (SOEs) or local governments or their financial vehicles (LGFVs) instead of private firms, which are issuing debt. This might be explained by a “reverse crowding out” that might be occurring in China’s banking sector, as a consequence of the People’s Bank of China (PBoC)’s push for banks to lend to the private sector, which pushes SOEs and LGFVs to the bond market as funding source.

From a sectoral view, one-fifth of the onshore bond issuance, once government bonds are excluded, goes to the real estate and/or infrastructure sector. In reality, most of the activity is in the shantytown renovation, following the government’s policies. This explains the much faster pickup in property investment compared to infrastructure and certainly not market forces. That said, the Chinese government may realize the infrastructure push solely relying on the public sector may not be sufficient to buffer the economic slowdown. In that regard, bond issuance by the private sector may actually increase in the second part of the year.

As regards private credit, one more interesting point to be made looking at bond issuance data is that high yield private firms have hardly issued onshore. Instead, they continue with their active issuance in the offshore…