Moody's: China bond mkt dislocation unlikely to lead to systemic financial crisis

The latest report on China by the US ratings agency, Moody’s Investor Service, revealed that the rising yields of higher-risk corporate bonds in China may have left the market at risk of dislocation.

Key Quotes from the report:

"The bond market's limited role in financing China's corporate sector; the banks' capacity to increase lending to help distressed borrowers; and the authorities' ability to intervene and exercise moral suasion would all act as counters to a crisis," says Lillian Li, a Moody's Vice President and Senior Analyst.

"We note that, in the current situation, the rising yields of higher-risk corporate bonds in China's (Aa3 negative) onshore bond market since 3Q 2015 may have left the market at risk of dislocation, a situation which in principle would increase corporate funding costs and defaults, and could ultimately lead to a credit and liquidity crunch," adds Li.

"The likelihood of a financial crisis would increase if banks' balance sheets weaken significantly or the growing interconnectedness with the shadow banking system increases the transmission of shocks. These are not our baseline assumptions, however," says Li.