TALKING POINTS – AUD/USD, China, Corporate Bond Defaults
- Default on Chinese corporate bonds sharply rose in 2018
- Slower growth from trade wars and higher interest rates
- How will Australian Dollar fare with slower growth in China?
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A report put out by the Financial Times showed that defaults on Chinese onshore corporate debt skyrocketed in 2018, with between 117-119 recorded at a principal value of $16.3 billion. For perspective, there were approximately 35 defaultsin 2017.
This has occurred against the backdrop of a slowdown in global growth courtesy of trade wars and tightening credit conditions. Chinese policymakers have responded with the implementation of stimulative measures to ramp up economic activity. Some of these include the People’s Bank of China recently cutting the reserve ratio requirement for banks and massive tax cuts from the government.
This news comes shortly after Monday's release of China’s GDP numbersthat put growth at the slowest rate since 1990. The quick pick-up in defaults uncloaks the deeper underlying struggles in the country’s debt-fueled growth model. Billions of dollars’ worth of corporate bonds will mature this year. Private sector investors and public officials are wondering how the owners of this debt will repay it.
As faith in the strength of China’s growth begins to fade, risk appetite for AUD/USD may begin to rapidly sour. The trade war dispute – a massive source of uncertainty that weighed down on the Aussie in 2018 – is still unresolved, with the latest update signaling a potential roadblock on issues of intellectual property.
AUD/USD – 3-Hour Chart
Looking ahead, the World Economic Forum in Davos, Switzerland – trending online as #WEF19 – takes place this week where global leaders and economists will weigh on the outlook for 2019. The tone for the meeting already started off grim with the IMF publishing its updated 2019 global growth forecast with a revision down to 3.5%, the slowest in three years. Needless to say, China may not like what 2019 has to offer and the Aussie will likely suffer from it.
AUD/USD TRADING RESOURCES
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter