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Coronavirus And China’s Never-Ending Spinning Plates Routine

The anti-epidemic bond issuance story is a microcosm of a broader narrative.

The number of confirmed coronavirus cases in China fell on Friday, data released Saturday by the National Health Commission showed.

2,641 new confirmed infections pushes the total to 66,492. 1,523 people have died on the mainland. Authorities in the country are resorting to increasingly draconian measures to contain the spread, including a mandatory two-week self-quarantine for those returning to Beijing after the holiday.

As Reuters puts it, “cities remain in lockdown, streets are deserted [and] employees are nervous”.

The following two visuals from Capital Economics show daily passenger traffic in China as well as the trajectory of deaths, infections and recoveries (for what it’s worth, CapEcon has made some of these charts available for free to the public and you can view them here).

(Capital Economics)

On Saturday, an 80-year-old Chinese man died at a hospital in Paris, according to France’s health ministry. It was the first death from the virus outside of Asia.

Meanwhile, the US is evacuating American citizens aboard to the ill-fated Diamond Princess cruise ship, which houses the largest concentration of infections outside of China and remains quarantined at the port of Yokohama in Japan.

Chinese Foreign Minister Wang Yi attempted to strike an upbeat tone in remarks at the Munich Security Conference (where Mike Pence famously bombed last year).

“The epidemic has posed a severe challenge to China’s economic and social development”, Wang remarked, stating the obvious. “Nonetheless, the difficulties will be temporary and short-lived. With its strong resilience and vitality, the Chinese economy is well-positioned to overcome all risks and challenges. The fundamentals sustaining sound economic growth have not changed and will not change”.

That may be true, but in the near-term, this is a rather vexing problem. And, predictably, some of the “solutions” are having amusing side effects.

For example, corporates are using “anti-epidemic bond” issuance to roll existing debt, as opposed to… well, as opposed to funneling the proceeds to virus-fighting initiatives, which is what you’d imagine “anti-epidemic” bonds should be used for. The following simple chart shows the total amount of special purpose bonds issued by 10 Chinese corporates, and the breakdown of how the funds are being allocated.

(Bloomberg data, through Feb. 10)

So, really, this is a refi initiative under cover of an anti-virus campaign. “In terms of the use of proceeds, the bonds would to some extent relieve the companies’ short-term debt repayment pressure, in addition to supporting their funding for fighting the epidemic”, an analyst at Hong Kong-based Tianfeng Securities said last week.

Little wonder that corporates are more than happy to take advantage of the opportunity. As Bloomberg noted a few days ago, “a total of 6.8 trillion yuan worth of corporate bonds are set to mature this year, the second-biggest amount after last year’s record 7.6 trillion yuan [and] most issuers managed to sell their special new bonds at cheaper costs due to robust demand from state-run banks and financial institutions, often at the authorities’ encouragement”.

Private defaults have hit records for two consecutive years in China, although SOE defaults remain subdued.

The virus bond issuance story is a microcosm of a broader narrative when it comes to China. Beijing has, for years, been engaged in what amounts to a spinning plates routine, balancing competing economic priorities in a bid to transition the economy to a more sustainable model and pacify international calls for transparency and market-oriented reforms.

Shocks like the trade war and, now, the epidemic, threaten to bring the juggling act to an unceremonious end. Or, at the least, cause Beijing to drop one of the balls.

The problem is that with the global financial system now more interconnected and interdependent than ever, a “mishap” in the world’s second-largest economy would be bad news for everyone.

That’s something to keep in mind when you hear folks like Kyle Bass suggest that the best solution would be to let the virus decimate the Chinese leadership.


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