Credit Trends: Demystifying China’s Domestic Debt Market (S&P Global Ratings)

HIGHLIGHTS

– China’s domestic corporate debt market, with debt outstanding of $6.6 trillion, is the third-largest domestic corporate (financial and nonfinancial) debt market, trailing the nearly $9 trillion U.S. market and Europe’s $7.4 trillion (considering intra-European debt issuance as domestic funding).

– The market is split between the larger interbank market and smaller exchange markets (Shanghai and Shenzhen). Local government financing vehicles account for a sizable portion of the interbank market debt outstanding (over 60% by new issue count in 2014).

– As in many other countries, a number of market participants, like insurance companies and asset managers, engage in a buy-and-hold strategy for long-term debt in China, and banks typically match shorter-duration debt with their short-term liabilities, favoring liquidity over higher yields, as do money market funds.

– Looking ahead, China must carefully balance its need for economic growth with its need to manage the significant growth of its debt burden.

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