Notes’ charms

China Daily (Canada) - - BUSINESS -

The cheng­tou mar­ket’s fond­ness for

debt prompted a surge in is­sues dur­ing the sec­ond quar­ter to a record 568 bil­lion yuan ($91.6 bil­lion), the high­est since 2002, ac­cord­ing to Shang­hai-based Wind In­for­ma­tion Co Ltd.

Is­sues to­taled 353.1 bil­lion yuan in the first quar­ter of the year.

The in­creas­ing pop­u­lar­ity of cheng­tou notes, which are con­sid­ered cor­po­rate notes, helped push down is­suers’ costs. Yields on two-year AAArated notes have dropped 137 ba­sis points this year to nearly a 10-month low of 4.86 per­cent, ac­cord­ing to Bloomberg.

Com­mer­cial banks have been quick to jump on the band­wagon, snap­ping up a ma­jor­ity of the high-rated bonds. One AAA-rated note drew bids for al­most six times the amount of­fered, and even an AA-rated note at­tracted bids for three times the of­fered amount, Li said.

Sev­eral fac­tors are con­tribut­ing to the buoy­ant mar­ket, an­a­lysts said.

On the sup­ply side, most of the LGFVs is­sued their first debt in 2009 as the mar­kets were awash with liq­uid­ity, the re­sult of the cen­tral govern­ment’s stim­u­lus spend­ing to off­set the global fi­nan­cial cri­sis. IS­SUES OF NOTES IN 2014 Many of those is­sues were in the form of five-year notes, which come due this year.

Re­fi­nanc­ing de­mand is strong, and rollovers were ap­proved in late Fe­bru­ary by the Na­tional Devel­op­ment and Re­form Com­mis­sion, which over­sees cor­po­rate note is­sues.

On­the de­mand side, am­ple liq­uid­ity is driv­ing en­thu­si­asm. The tight mone­tary pol­icy that caused a credit crunch in mid-2013 es­sen­tially ended in March. An­a­lysts said that if liq­uid­ity is tight­ened again in the sec­ond half of this year, bond yields could spike again.

More­over, last year, the govern­ment be­gan to limit banks’ pur­chases of so-called­non­stan­dar­d­as­sets, suchas trust loans, mak­ing cheng­tou rel­a­tively more at­trac­tive. Both types of as­sets have rel­a­tively high yields, mak­ing them use­ful for banks that repack­age them into wealth man­age­ment prod­ucts for sale to clients.

But cheng­tou notes com­monly of­fer at least im­plicit govern­ment back­ing, un­der­writ­ers claim.

In­lateMay, theMin­istry of Fi­nance for the first time al­lowed 10 prov­inces and cities to sell bonds in­de­pen­dently in a pilot pro­gram, aim­ing to re­place risky and opaque bor­row­ing by LGFVs with a mu­nic­i­pal bond mar­ket sim­i­lar to that of the United States.

A doc­u­ment is­sued by the NDRC said the pilot pro­gram would ex­pand and grad­u­ally re­place bonds is­sued by LGFVs, whose debts gen­er­ally do not carry ex­plicit govern­ment guar­an­tees. This doc­u­ment boosted ex­pec­ta­tions that the sup­ply of cheng­tou notes will shrink, mak­ing them more pop­u­lar.

Cheng­tou notes “are be­com­ing a rare, high-in­vest­ment-value op­tion”, said Lin Na, a bond an­a­lyst with China Galaxy Se­cu­ri­ties Co Ltd.

Another land­mark event came in early March, when Shang­hai Chaori So­lar En­ergy Science & Tech­nol­ogy Co failed to re­pay its debt, be­com­ing the first cor­po­rate bond to de­fault in China. The event re­minded the mar­ket of the po­ten­tial risks of cor­po­rate bonds, which — un­like cheng­tou — have nei­ther ex­plicit nor im­plicit govern­ment guar­an­tees.

“March was a water­shed. Since then, sales of cheng­tou kept ral­ly­ing,” said Liu Dan, another an­a­lyst at China Galaxy Se­cu­ri­ties.

Ivan Chung, se­nior vice-pres­i­dent at Moody’s In­vestors Ser­vice Inc, said that in late 2013, mar­ket sen­ti­ment was to­tally dif­fer­ent. Liq­uid­ity was tight, and the mar­ket was anx­ious about the scale of lo­cal govern­ment debt, which had not re­cently been tal­lied.

Then, on the last day of 2013, the Na­tional Au­dit Of­fice dis­closed the size of lo­cal govern­ment debt: more than 10 tril­lion yuan. And later came theNDRC’s move to al­low rollovers of LGFV debts.

“It was like all of a sud­den, the fate of cheng­tou notes be­came clear,” Chung said.

Some of the money raised by new cheng­tou is­sues went into ur­ban ren­o­va­tion projects and in­fra­struc­ture, which helped off­set the down­ward pres­sure of the sag­ging prop­erty mar­ket this year. How­ever, the ben­e­fit did not come with­out a cost.

The ma­jor cost was that the mar­ket turned a cold shoul­der to pri­vate com­pa­nies’ bonds. Many com­pa­nies had to de­lay planned bond of­fer­ings, and some is­sues failed for lack of bids.

“We’ve sug­gested to sev­eral of our clients to de­lay their is­sue plans be­cause the cur­rent cost of debt is too high. How can these pri­vate firms fi­nance at above 8 per­cent yields? They are not State-owned en­ter­prises,” said a bro­ker with a se­cu­ri­ties firm who de­clined to be iden­ti­fied.

The cheng­tou seg­ment is now so dom­i­nant that it ac­counted for nearly 90 per­cent of the new cor­po­rate notes on of­fer in the past quar­ter.

Re­fer­ring to nu­mer­ous LGFVs that have rarely been pru­dent in their bor­row­ings, Xu Gao, chief econ­o­mist with Ever­bright Se­cu­ri­ties Co, said: “While the bond mar­ket has been lib­er­al­ized, not all the par­tic­i­pants are mar­ket-ori­ented en­ti­ties.”

The real so­lu­tion is for these en­ti­ties to exit the mar­ket, Xu said.

Pub­lic projects such as roads, gas pipe­lines and af­ford­able hous­ing, which are crit­i­cally im­por­tant for China, should be built by a more “proac­tive” fis­cal pol­icy, Xu said.

Ques­tions still linger over a pos­si­ble cheng­tou de­fault. Xu and many other an­a­lysts said it is al­most im­pos­si­ble for lo­cal gov­ern­ments to al­low that to hap­pen be­cause a sin­gle de­fault would cast a shadow over all cheng­tou notes and trig­ger sys­temic risks.

That view sus­tains the mar­ket’s ap­petite for cheng­tou, at least for now. Con­tact the writer at zhengyang­peng@chi­

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