Bond selloff reveals China credit restraint challenges

A gradual tightening of short-term credit by China’s central bank – combined with rumors of liquidity squeezes at brokers – prompted a mini-rout in the country’s $8 trillion-plus bond market last week, forcing authorities to reverse course and inject some $86 billion in short- and medium-term funds, according to The Wall Street Journal. China’s main stock indexes also tumbled following moves by regulators to crack down on some speculative investors. Adding to market worries, China’s currency, the yuan, has fallen to its lowest level against the US dollar since 2008 as more Chinese move their wealth out of the country despite strict capital controls. The bond selloff is raising concerns about the stability of China’s opaque and deeply intertwined credit markets. Like all bonds world-wide, Chinese bonds are under pressure from the US Federal Reserve’s plans for faster interest-rate increases than some expected.