Chinese stocks, unexpectedly, took a drumming, falling 3% on Thursday.  The Financial Times reports:

China’s blue-chip index suffered its worst one-day fall in 17 months on Thursday, as investors cited rising bond yields and tough new regulations targeting corporate debt for scaling back their exposure to equities after a strong performance this year.  The yield on 10-year Chinese government bonds rose above 4 per cent, before easing in late trade according to ChinaBond, the latest milestone in a bond rout that has gathered pace over most of this year.  Analysts say the bond turmoil reflects the government’s increasing determination to rein in runaway debt growth, raising concern among investors that China’s economy will slow and knock global demand for commodities.

Of course, one of the true ironies is that, in short, China’s attempt to rein in the leverage in the informal trust and banking sectors has, at least short run, the impact of disrupting the country’s capital markets.

Last week, five regulators led by the People’s Bank of China introduced the toughest rules yet designed to curb shadow banking. They restrict banks’ ability to buy bonds with borrowed money and to lend to corporate clients through off-balance-sheet channels. 

However, by restricting shadowbanking, the new policies will inevitably undermine demand for corporate bonds—and by extension, hamper “economic growth and corporate earnings via tighter credit conditions.”

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