Why the Price of Stocks in China Matters to U.S. Credit Buyers

China Has Entered the Bust Phase: Whelan

The effects of China’s economic slowdown are trickling into the U.S. debt markets in some small, but meaningful, ways.

Investors have suffered a 13 percent decline this year on $56 billion of junk-rated debt of metals and mining companies such as Arch Coal Inc. and Walter Energy Inc., which filed for bankruptcy protection this month. That world of hurt contrasts with a 1.6 percent gain in the $1.4 trillion U.S. high-yield bond market, according to Bank of America Merrill Lynch index data.

You can blame China for some of these hefty losses, since the world’s second-biggest economy consumes more than 40 percent of the world’s coal, copper and steel production, according to Barclays Plc analysts. This $10.4 trillion economy is expanding at the slowest pace in a quarter century and just experienced its worst stock-market selloff in about two decades.

“The repercussions of the recent stock-market declines in China on U.S. credit is in some ways easier to quantify but in others more difficult,” wrote Barclays analysts led by Jeffrey Meli and Bradley Rogoff. “The easy answer can be seen in the recent performance of metals and mining credits, which are hugely leveraged to China.”

Jumpy Buyers

It’s understandable why China’s economic uncertainty is making American debt buyers jumpy. The nation’s government had to intervene by halting trading in many stocks and buying securities with leverage in order to stop a rout that eliminated about $4 trillion of market value from Chinese stocks in four weeks.

Meanwhile, there are signs that the nation’s slowdown is deepening. On Friday, a private gauge of manufacturing in the nation unexpectedly declined to the lowest level in 15 months.

There’s a lot of gloom and doom about China, including the scary thought from Morgan Stanley analysts that the nation may soon tip the world into recession. For now, the effects of China’s woes haven’t been directly (and immediately) felt in many U.S. industries.

While many U.S. companies haven’t directly felt the effects of China’s woes, several have -- even outside the metals and mining industries -- such as gambling operator Wynn Resorts Ltd. and equipment-maker Caterpillar Inc., as well as technology companies United Technologies Corp. and Fairchild Semiconductor International Inc., the Barclays analysts wrote in a July 24 report.

Wynn’s dollar-denominated bonds have declined 2.4 percent since the end of May alone, Bank of America Merrill Lynch index data show. That may sting, but it doesn’t look so bad compared with the 62 percent plunge in bonds of Peabody Energy Corp. so far this year, the 46.5 percent decline in Arch Coal debt, and 49.5 percent drop in Walter’s notes.

Just another reason why it pays to know which company’s bonds you’re buying -- and what you’re counting on to get your money back.

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