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Chinese Credit Market Adds To Fed Jitters

Cinthia Murphy

Surging short-term borrowing rates in China helped spook global markets this week, as investors wondered whether slowing growth was morphing into something more perilous for the world’s second-biggest economy, which has been a key driver of global demand for the past decade.

Thursday, China’s overnight lending rates surged to a record level of 25 percent at one point, hinting of a potential credit liquidity crunch risk that echoed what sparked the credit crisis of 2008.

China, which seems to be more focused on long-term growth fueled by structural reforms rather than by a government getting involved tactically in financial markets, did intervene Friday. The People’s Bank of China released funds to lenders Friday, helping push rates below 8 percent, according to MarketWatch. The aim was to control borrowing costs for those in need of short-term cash given that anxious banks had grown reluctant to lend.

China’s economic woes come at a bad time for a U.S. market that’s already struggling with the prospects of a sooner-rather-than-later end to the easy-money policies that helped the U.S. economy emerge from its worst downturn since the Great Depression. The U.S. Federal Reserve this week alluded to the possibility that its massive bond-buying program designed to keep long-term rates low and spur growth may be coming to an end as the economy gains momentum.

Equities, bonds, gold and oil markets all plummeted Thursday and continued on their downtrend Friday amid concerns that as the Fed tapers off its intervention, China’s government might not do enough to spur growth there. In the first quarter, China’s GDP expansion came in at 7.7 percent year-on-year, and the latest data including manufacturing are suggesting that growth rate could slip further.

China-focused ETFs are feeling the heat. The $5.6 billion iShares FTSE China 25 (FXI), the market’s oldest equities ETF targeting the Middle Kingdom, has now fallen 16 percent year-to-date, according to data compiled by IndexUniverse, and is now trading at its lowest levels since September.

The fund, which saw net asset outflows of some $30 million on Thursday, has suffered outflows of $1.83 billion since Jan. 1.

One of its competing funds, the $1 billion SPDR S'P China ETF (GXC), is also hovering around nine-month lows. GXC, a popular China-focused ETF due to its broad coverage of relatively smaller companies than FXI, has now lost 11 percent of its value since the beginning of the year amid modest outflows.

In the bond space, the still-small $64.5 million PowerShares Chinese Yuan Dim Sum Bond Fund (DSUM) remains the most popular vehicle U.S. ETF investors are using to tap into China’s yuan-denominated government and corporate bonds issues outside of China. The nearly two-year-old fund has seen gains of 2.5 percent year-to-date.

Similarly, the Market Vectors Renminbi Bond ETF (CHLC), which targets dim sum bonds with higher credit quality, has tacked on gains of 1.5 percent in the same period.


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