The Man Who Bet On Chinese Debt

When Chen Yang was fresh out of university, China’s government rarely failed to protect lenders and borrowers. Today, Beijing is allowing the bond market to grow up, forcing Chen and others like him to become experts in credit analysis.

- Carrie Hong and Christopher Anstey

It was 2007, and China’s economy was expanding at a blistering 14 percent a year. At Nanjing University in eastern China, Chen Yang, a finance major, was a year away from graduation. Most of his classmates were streaming into banks and brokerages to take jobs tied to a stock market that was on fire. But at a campus recruitment presentation, an American fixed-income trader pointed Chen in a different direction: bonds.

He took the advice —and went on to ride a wave of debt growth that’s proved far bigger than he’d anticipated. From the equivalent of $1.7 trillion at the end of 2007, China’s bond market surged toward $13 trillion by the end of last year.

Now 37, Chen heads fixed-income investment at Shanghai Securities Co. “During the first few years of my trading career,” he says, “I would need my boss’s permission to do a trade over 30 million yuan [$4.5 million]. Now we very often do transactions of hundreds of millions of yuan.”

The boom in demand for borrowing came from all quarters, including state-owned enterprises, government authorities, and private-sector companies. And along the way, foreign investors have piled in: Since mid-2015 policymakers have steadily lowered barriers to entry in an effort to relieve pressure on the yuan’s exchange rate caused by wealthy Chinese moving money out of the country.

Recently the market has been hit by record defaults, which are starting to reshape how debt is priced. In developed nations, it’s taken for granted that borrowers pay different rates based on their creditworthiness. In China, there was for years an implicit government guarantee on almost all borrowing, lest corporate failures trigger social unrest and endanger the stability of the whole system.