Debt crunch threatens China and emerging markets

Thursday, September 29, 2011
By Paul Martin

Europe’s banking woes have begun to set off a funding crunch in the emerging markets of Asia, Latin America, and Eastern Europe, leaving them nakedly exposed as the rich world slides into a double-dip downturn.

By Ambrose Evans-Pritchard
28 Sep 2011

Corporate bond issuance has collapsed by three-quarters over the past three months in these regions, touching the lowest level since depths of the Great Recession in early 2009, according to Bloomberg data.
Contagion has spread to Chinese “Dim Sum” bonds issued in yuan on the offshore market in Hong Kong, where companies linked to China’s property market and building sectors have taken a beating. Yields on Dim Sum bonds jumped by 105 basis points to 5.85pc in August, the worst month since the instruments were created.

While China dances to its own tune, fears are growing that a global relapse could strike as the country’s debt excesses come back to haunt it. The Shanghai bourse tumbled on Wednesday to a 14-month low and is now 60pc below its 2008 peak.

Property groups China Vanke and Poly Real Estate have led the falls. Some developers have already cut home prices by 20pc to clear the glut. Standard & Poor’s expects credit conditions for Chinese builders to “become increasingly severe”. The Industrial and Commercial Bank of China said on Wednesday that it plans to raise up to $11bn in fresh capital to shore up its defences.

Morgan Stanley said emerging economies have $1.5 trillion of external debt that has to be rolled over on a 12-month basis. Most of it is owed by companies and issued in dollars.

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