from ZeroHedge:

With “risk” in most of the developed world seemingly a long forgotten four-letter word, as seen by today’s plunge in the VIX to a level not seen since 1993, traders hoping for some “risk event” have been confined to the recent turmoil in China, where overnight not only did trade data disappoint, with both imports and exports missing, but bond yields jumped to the highest level since 2015, dragging stocks lower even as the local commodity crash slammed iron ore and copper to new YTD lows.

While largely a “controlled” tightening, meant to contain China’s out-of-control shadow banking system, the recent gyrations in Chinese capital markets are starting to have a profound impact on local funding, resulting in a collapse in new bond issuance, and according to FT calculations, in April the number of aborted issues rose to 154, up from 94 in March, 32 in February and 31 in January.

As DB added, “local bond markets are practically shut for corporates. In fact, YTD issuance is down 40%+ yoy and net issuance has been negative in three out of the first four months this year. A number of issuers are being forced to cancel bond issuances (over RMB100 billion YTD) and there were reports (Bloomberg) of even CDB halting issuance (though subsequently denied). Some AA corporates are now issuing at north of 7%.”

These signs of mounting stress in China’s $9.3 trillion bond market come less than a month after the country’s banking regulator, Guo Shuqing, was quoted as supporting a campaign to sort out chaotic practices, and threatening to resign if the banking system became “a complete mess”.

Overnight, Deutsche Bank’s China analyst Harsh Agarwal noticed the “gyrations” in the bond market, and compared the current selloff in onshore bonds to the similar episode one year ago, saying “this time, it’s sharper and longer – AAA yield & spreads are almost 200bp and 100bp wider respectively in the past 6 months or so – because of China’s focus away from growth to deleveraging. This is far from over in our view. Every day we see headlines on new regulations trying to control leverage in different parts of the system – WMPs, insurance companies, banks, etc. Having said this, we do believe in China’s ability to make a U-turn quickly if the situation goes beyond control, and see these changes as a long term positive, hence we are not overly worried as of now.”

Maybe not as of now, but Agarwal is surely getting more concerned with every incremental negative news out of China, even as the PBOC refuses to inject more liquidity, as it just did moments ago when for the third day in a row, the central bank skipped open market operations.

Meanwhile, confirming that Beijing is clearly concerned about developments behind the scene, potentially culminating in the worst possible case for China’s banking system – a shadow bank run -China Banking Regulatory Commission said in guidelines on banks’ collateral management posted on its website.

Commercial banks should carry out pressure tests on collaterals at least once a year, China Banking Regulatory Commission (CBRC) posted new guidelines on banks’ collateral management, among which that banks should revalue collateral at least once a year; and that banks are being urged to prevent risks in the collateral business. Of course, since this is the country where due to “infinite rehypothecation” of collateral, thousands of tons of copper and aluminum were “found” to be missing at China’s Qingdao Port, urging Chinese banks to engage in collateral “quality control” seems like a lost cause.

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