During the recent equity sell off in China, many investors flocked to the safe haven of bonds, and in the process push up the price of bonds to the highest in six years.This prompted companies to issue bonds to the highest level on record.
In an economy which is showing signs of fatigue and slowing down, revenue and profits are bound to decline. So companies may face difficulties in meeting the interest payments for bonds, more so because they had issued bonds at record pace.
So could this be a case that China, after the collapse of the stock market in July, 2015 could see another bubble forming in the bond market? Is this a case of being out from the frying pan and into the fire?
A bond market crash in China would surely cause a rout in bond markets in emerging markets, and this could spell trouble for many of the emerging economies which are heavily indebted, and where foreign ownership of the bonds are high.
What next is a stock market sell off and a fall in the value of currencies vs the US$.
The world as it is, is watching China. China is the 800 pound gorilla in room and if its economy runs amok, emerging economies will be the collateral damage.
Link: http://www.bloomberg.com/news/articles/2015-10-08/if-you-thought-china-s-equity-bubble-was-scary-check-out-bonds
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