Incoming data continue to point to strength in domestic activity, spending and revenues. Yet strains in China’s corporate bond market continue to grow, with the value of defaults hitting all-time highs. This underlines the degree to which credit risk in China hinges on shifts in the policy stance rather than fundamentals. Defaults, particularly by state-owned firms, happen when policymakers allow them to, and there have been more defaults by state firms over the past six months than by private firms. That’s never happened before. This campaign to instil more discipline in credit markets will continue as long as policymakers remain confident about the economic backdrop.
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