US corporate debt a threat to global financial stability

At a recent forum he attended, former deputy finance minister Zhu Guangyao said that negative interest rates around the world should be taken seriously, since bonds priced at negative interest rates pose a major challenge to global financial stability. 21st Century Business Herald comments:

Many economists now believe that if there is a new economic crisis, it will probably be caused by corporate bonds. Indeed, some insiders, including Fed Chairman Jerome Powell, believe the rapid growth of corporate debt in the US could pose a threat to financial stability.

Since 2008, the Federal Reserve has carried out rounds of quantitative easing policies, which have resulted in long-term low interest rates and encouraged the market to borrow more money, eventually leading to a debt flood. However, a large portion of these debts have not been invested in production but used to pay dividends, share buybacks and acquisitions. Debt-financed share buybacks have also been a major driver of record highs in the US stock market in recent years. In a recent report, the International Monetary Fund warned of the risk high asset prices pose to financial stability.

Low interest rates have not only encouraged businesses to borrow, but also fueled the rise of consumer debt, which means the consumer demand that fueled the US economic boom is running out of steam. The policy of long-term low interest rates is intended to stimulate growth through more debts, but it has increased vulnerabilities, as financial policy has been hijacked by debt. Once monetary policy tightens, it will put pressure on asset prices and huge debts and worsen credit quality.

For a long time, because of lower interest rates in developed economies, capital has flowed from the developed to emerging economies, leading to a continuous rise in the latter's external debt. Under this situation, if financial policies are significantly tightened, it would lead to higher borrowing costs and make these economies hard to service their debts. That means a decade after the global financial crisis, the fragility of the global economy has increased not decreased.