Chinese Private Debt Troubles Growing

Nikkei Asian Review

 SHANGHAI -- Concerns over potential defaults on high-yield financial products are making Chinese companies put some debt issues on hold due to wary investors, as well as posing a potential new risk to the global economy.
     Since January, nine companies have postponed or canceled issuance plans for a total of 5.75 billion yuan ($948.24 million) in bonds and commercial paper, equivalent to about 2% of the debt issued over the period.
     This is most pronounced among privately operated companies, whose lack of government backing has meant less interest from potential investors than hoped.
     Demand has been dulled by worries over defaults on so-called wealth management products, a feature of China's shadow banking system.
     Broader credit risks have driven interest rates up, and the gap between corporate debt and more-creditworthy government bonds is widening. Average yields on AA-rated seven-year corporate bonds reached 8.44% in mid-January.
 My view:

Massive capital flows in China have resulted in some strange decisions by local authorities.

Construction of empty cities is perhaps the clearest example of this phenomena.

As time has passed since the first global credit crisis of 2008, capital continues to flow into questionable projects and enterprises.

Now, private companies that are not state-owned are feeling the pinch due to investor concerns regarding of return of capital, not just return on capital.

If defaults grow, we may see contagion spread to broader sections of the Chinese economy and then to global stock markets.