Onshore liquidity crunch to undermine China credit

China’s worsening borrowing conditions could prompt a rise in bond supply and corporate defaults, threatening the credit profiles of local companies, says Morgan Stanley.

The market for Chinese credits is likely to remain under pressure from rising bond supply and risk of corporate defaults. These are the side effects from the cyclical deterioration in the mainland’s borrowing conditions that result from a more constrained financial sector.

In the short term, market risks will be dominated by tighter financial conditions reduced availability and higher cost of credit which results in financial sector deleveraging, according to a Morgan Stanley report.

“Tighter financial conditions create two types of pressures on China credit markets it increases refinancing risks and therefore the risk of defaults, and it increases the need for corporates to have access to...

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