Hidden costs of China’s efforts to stem capital outflows are starting to become apparent, for example in the swelling market for dollar bonds sold by Chinese issuers. Risk starts with limits on Chinese individuals putting money into hard currencies abroad. Instead, they’re converting into dollars at banks at home, as allowed under forex regulations. Banks are then taking those dollar deposits and buying bonds, many of them sold by Chinese companies. Chinese banks have snapped up bonds sold by government-controlled issuers including asset-management companies, some of which have then used the proceeds to buy high-yield debt. The links from individual depositors to banks to asset-management companies to junk borrowers generates risk. The numbers are smallish, but growing. Junk-bond issuers have produced a record $12.7 billion of dollar-denominated offerings so far this year, compared to last year’s $1.9 billion, according to Bloomberg.
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