China's appetite for debt is taking a toll on its neighbors. While the country's much-hyped financial blow-up has yet to happen, the endless leveraging of its corporations has made them responsible for a record share of dollar and euro bond issuance in the region.
Chinese companies accounted for 65.2 percent of all dollar and euro corporate notes sold this year in Asia excluding Japan and Australia. Including those developed nations, they took up almost 60 percent. Meanwhile, the participation of India dropped to 2.8 percent, the lowest since 2009. Indonesia has been all but pushed out, accounting for less than 1 percent.
The trend has been less exaggerated in the loan market, where banks seem to be more wary of China. Yet the country still led, taking 39.1 percent of all dollar and euro facilities signed this year, the most since 2010. India's portion has dropped from more than a third of the market to less than 14 percent.
Taking bonds and loans together, China swallowed about half of all the dollars and euros raised through debt since Dec. 31, the most since 2004.
The sucking up of so much liquidity has serious consequences. From the investor side, it means further concentration of portfolios. That's already an issue for funds that follow regional bond benchmarks. China represents 37.7 percent of the Bank of America Merrill Lynch Asian Dollar Index and an even higher percentage of the regional high-yield gauge. Hong Kong accounts for a further 10 percent, raising the total share of Greater China to almost half the bonds on the index. Because the majority of new securities added are coming from China, that share will rise.
Then there is the crowding-out effect. Companies in other Asian countries, which are already suffering from a slowdown in China, now find there's even less financing available. As a result, they are investing and hiring less, slowing local economies further.
Debt markets are tying their fate ever more to Asia's biggest economy. With indebtedness in China at a peak and still growing fast, that can't be good. The nation's leverage is becoming more and more everyone else's concern.
As the saying goes, when the bond market sneezes, the economy catches cold. Debt investors had better hope President Xi Jinping doesn't start to sniffle: Every portfolio manager in Asia will be in bed with the flu.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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