"In ominous echoes of what happened before, and certainly after the Lehman failure,” say analysts at Zero Hedge, "it has gotten far harder for corporate bonds to be accepted as collateral for repo financing as lenders increasingly demand top quality bonds such as Chinese sovereign bills and policy bank notes as pledges.”

That’s the thing about credit-market cracks. They tend to emerge with little warning and spread quicker than even the bears imagined. September 2008, when Lehman Brothers imploded, is a case in point.

Risks are even greater in an opaque, developing nation like China. The black-box nature of China Inc. warps yield levels, credit spreads and the sober allotment of credit ratings. Along with censoring the media and Internet, Beijing discredits or blacklists overseas researchers highlighting risks.

Earlier this month, China began allowing local governments to increase borrowing even further for infrastructure. It also will allow municipalities to use proceeds from bond sales as equity in certain projects, including highways and railways. This alone could raise already precarious risk profiles around the nation.

The upshot: when China’s debt markets do crater, it will come out of nowhere for even the savviest of investors.

Hide Comments | Add Comment