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January 22, 2007
China, Corporate Bonds and Weakness in the Financial System
For those involved in China finance, read Joe Studwell's latest column:
Over the medium term, the big significance of the move on corporate bonds is diversification of systemic financial risk. A financial system with three legs is harder to knock over than one with two. Moreover, while we have seen emerging market financial crises based on state bonds (Latin America) and corporate bank borrowing (south-east Asia), we have yet to see one result from the issuance of corporate paper.
Perhaps China will show that corporate bonds can produce a crisis. But more likely this is the last chance to diversify and strengthen the financial system in this period of particularly fast growth. When growth slows, as a result of diminished external demand or a falling number of labour market entrants early in the next decade, and banks begin to report higher non-performing loans, the system will need resilience.
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