Credit markets in China are struggling with a series of defaults and credit events from state-owned enterprises. Triple-A ratings and government guarantees are now being questioned. This has major implications for overall economic growth and infrastructure investment if local government financing vehicles start defaulting in larger numbers and lose access to the market. Interbank liquidity conditions have tightened as non-bank financial institutions face redemption pressures, after defaults reduced their asset valuations. A repeat of the post-Baoshang squeeze is brewing as investors are tightening collateral requirements again. Credit risks and defaults in the corporate bond market will certainly increase in 2021, and credit spreads over risk-free assets are likely to widen.
