What's going on?

Turns out China is cast in the same mold as Europe after all: its government sold negative-yielding bonds for the first time ever on Wednesday (tweet this).

What does this mean?

The Chinese government only issued $5 billion worth of bonds, but demand was far higher than that: investors put in over $20 billion worth of orders. That level of interest pushed the bond�s price higher and higher, which in turn pushed its yield � i.e. the return an investor earns, which moves inversely to the bond�s price � down into negative territory. That�s an unusual situation: a negative bond yield effectively means the investor is paying to lend to the issuers of the bond � in this case the Chinese government. And while record low interest rates mean it�s not uncommon in Europe, it is a new experience for China.

Why should I care?

Zooming out: Why oh why?

There�s a couple of reasons investors would want to buy Chinese debt that won�t pay them anything. For one thing, they might be obligated to hold a certain portion of bonds in their portfolio � and considering yields on China’s are still higher than those of Europe’s, Chinese bonds are the lesser of two evils. For another thing, the Chinese government issued this debt in euros, which it doesn�t do very often. Europe’s investors, then, might be keen to get in on a fast-growing economy that boasts a more positive outlook than either its European or US counterparts.

The bigger picture: Every man for himself.�

The Chinese government may have no problem finding money to borrow, but the country�s state-backed companies sure do: just last week a Chinese state-owned coal miner defaulted on its loans, and it wasn�t the first. Investors are starting to worry this is the start of a string of failed repayments for state-owned companies, and that the government will happily just let them go bankrupt. And since it�s China�s banks that lent them money in the first place, their stocks have started to slide too…