Market Wrap-up for Dec. 9 - The Big Story in China

Market Wrap-up for Dec. 9 – The Big Story in China


This morning, investors woke up to a tumble in global markets, after news from China spooked overseas indices. Across the globe, monetary policy makers have continued to adopt easy money tactics in an effort to prop up shaky economies. Today, Chinese regulators took steps to tamp down the growing risk in financial markets, a measure that should have been taken a long time ago.

China Seeks to Control Risk

Chinese regulators announced today that they have placed a ban on investors using low-grade corporate debt as collateral to borrow cash. Specifically, the country’s security clearing house stated that it has raised the threshold for corporate bonds qualifying as collateral for repurchase agreements (which are used by insurers, mutual funds, and brokerages for short-term funding).

Regulators will stop accepting newly issued corporate bonds for collateral unless they are rated AAA or are sold by issuers rated AA are higher, which sent bond investors scrambling to sell and raise cash.

Though the Shanghai Index sold off 5.4%–its biggest fall since 2009–most analysts believe China’s latest regulatory change is a good one for the economy. Over the years, the country’s financial system has become debt-laden, with investors using risky collateral to leverage their bets. In addition, Chinese officials are hoping to better regulate the LGFV market (China’s Local Government Financing Vehicle), in an effort to promote the development of a more transparent municipal bond market.

Fitch Ratings estimates that municipal debt has risen to about 30% of GDP, with cities and provinces continuing to issue debt in order to restore growth to a sluggish economy.

Why Does It Matter?

The reason why it’s important for investors to take a close look at this news is because China’s government is attempting to implement structural reforms that are aimed at sustaining economic growth for the long term. The reforms are meant to shift China’s dependence on state investment and exports to a more independent consumer-driven market.

As we’ve said many times before, what happens outside of the U.S., especially with China, can have a material impact on our domestic investments. Be sure to check out 7 Big-Name Dividend Stocks: An International Sales Overview to learn more about how U.S. companies are closely tied to foreign economies like China.

Stay current with all the latest news surrounding dividend stocks, including earnings reports, analyst moves, and much more on The Dividend Daily.