By Alan Murray and Geoffrey Smith
April 19, 2016

Is the Chinese debt bubble about to burst?


That’s the question being raised this morning by the folks at Bloomberg. “Spooked by a fresh wave of defaults at state-owned enterprises, investors in China’s yuan-denominated company notes have driven up yields for nine of the past 10 days and triggered the biggest selloff in onshore junk debt since 2014,” they write. New bond sales are being cancelled, and the rating agencies – always behind the curve – are scrambling to downgrade debt “at a pace unseen since 2003.”


We knew this one was coming. China’s corporate debt has been growing at a breathtaking rate – doubling in a year – and is now in the neighborhood of 150% of the nation’s GDP. That’s helping to hold up the nation’s growth, but it can’t go on forever. The fact the Chinese government is now allowing a few state-backed enterprises to default is probably a good thing, ending the perception of an implicit government guarantee. But the question is whether the Chinese central bank can manage an unwinding of corporate debt without triggering a rout.


We may be about to find out. Given its size, a swooning corporate debt market would be a much bigger test for the Chinese economy than last summer’s stock market plunge. Keep your eyes on this space.


More below, including the latest bolt of bad news for Elizabeth Holmes at Theranos. Enjoy the day.



Alan Murray


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