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China's higher rates don't matter, yet

June 7, 2017
Brandon Emmerich
Granite Peak Advisory

In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

Although China’s corporate debt load continues to worry government officials and tease western observers, borrowers have avoided problems because borrowing costs have plunged for much of the past three years. That’s why the recent spike in corporate bond yields is worrying – should yields remain high, high debt-servicing costs could shock the overleveraged corporate sector. It seems we have all the necessary ingredients for a balance sheet recession.

But, we’re not there yet. In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

Actual Interest Rates Remain Low

Chinese borrowers have maintained low interest payments for two reasons. First, they’ve cut back on borrowing since the rebound in yields. Second, when they do borrow, they do so at below the benchmark lending rate courtesy of a solicitous banking system. So, most existing loans were extended at previous, lower rates, and new loans are significantly underpriced.

How They Ditched the Bill

Despite large and growing debts, China’s borrowers have yet to suffer from a rebound in borrowing costs. Should banks continue to extend credit at below market rates, China’s balance sheet recession will just have to wait.

Brandon Emmerich

Brandon Emmerich

Principal
Granite Peak Advisory
  • Principal at Granite Peak Advisory. He helps institutional investors understand China’s financial markets and economy. 
  • Additionally, his data-driven research has been cited in the Financial Times, Wall Street Journal, New York Times, and Dow Jones Newswire.

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book

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Granite Peak Advisory

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In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

China's higher rates don't matter, yet

China's higher rates don't matter, yet

In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

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Novel Data on China's Auto Loans - An Inefficient Market

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How does an obscure factor like hiring practices impact firm valuation? That was the question posed by Deutsche Bank’s quant strategy group in a 2015 whitepaper titled, “Macro and Micro Jobenomics.” The report concluded that online job postings could be used to predict U.S. macroeconomic statistics and equity market returns. This piqued my interest – I wondered whether a similar process could be used for valuing A-share companies in China.

Brandon Emmerich

Brandon Emmerich

Principal
Granite Peak Advisory
  • Principal at Granite Peak Advisory. He helps institutional investors understand China’s financial markets and economy. 
  • Additionally, his data-driven research has been cited in the Financial Times, Wall Street Journal, New York Times, and Dow Jones Newswire.
Granite Peak Advisory

Granite Peak Advisory

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book
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