China’s bond market has faced new scandals over the past two weeks, resolved only with government intervention and extensions of informal guarantees. The uncomfortable reality for Chinese authorities is that limiting even non-banks’ exposure to risky assets in unregulated financing channels creates immediate risks for the stability of the Chinese financial system, which makes meaningful financial reform far more difficult, and dangerous. The key channel between fixed income market stress and the real Chinese economy is through wealth management product issuance volumes, which should squeeze a significant source of China’s bank asset growth and limit new credit growth in 2017.
