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March 27, 2014

Morgan Stanley Sees More China Defaults as Cash Squeeze Tightens

“More Chinese companies are heading toward default as higher funding costs and slowing growth weigh on existing debt commitments, according to Morgan Stanley.

“The pressures are now on for the corporate default rate to be moving higher,” said Viktor Hjort, the Hong Kong-based head of Asia fixed-income research at the U.S. lender. “Any economy that generates defaults usually needs three things, leveraged balance sheets, sluggish growth and tighter financial conditions. China ticks all three boxes.”

“Chinese issuers pay an average 6.22 percent for dollar-denominated securities, after yields touched 6.39 percent on March 20, the highest since September, JPMorgan Chase & Co. indexes show. Top-rated companies pay an average 6.05 percent for 10-year notes onshore, the most in a month and poised for the biggest monthly increase since November, according to Chinabond indexes.

“Corporate borrowing spiraled during the global credit crisis, as the Chinese government encouraged banks to lend to support the economy. Financial institutions are now clamping down on non-performing loans and curbing new lending, pushing up the cost of servicing this debt as the nation’s economy slows. A preliminary gauge of manufacturing missed estimates this week, suggesting factory output weakened for a fifth straight month in March.”

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Read full Bloomberg article here.

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