Dysfunctional bond market returns borrowers to shadowy loans

Year-end bank loans and shadow banking activities in China surged in an apparent move to fill the gigantic void left by a defunct bond market suffering from the major blow in December.

In December 2016, two dozen mainland securities houses were embroiled in a messy case of defaults on bond repurchase dealings, involving forgery of company seals and rogue employees, that ultimately necessitated the securities authority to step in to mediate a solution.

The dramatic volatility in the debt capital market during mid-December had led to the biggest free fall in treasury bond futures in recent years, with investors forced to sell their holdings in a bid to limit their losses, creating a vicious cycle of downward crumbling bond prices.

Data released by the People’s Bank of China on Thursday now confirms the negative spiral that had effectively shut down the Chinese bond market for companies looking to quench their liquidity needs before the arrival of the new year. Total social financing from corporate bonds turned out to show a net contraction of 130 billion yuan (US$18.73 billion) during the month versus November’s net issuance of 287 billion.