It’s All Sud­denly Go­ing Wrong in China’s Bond Mar­ket

The Economic Times - - Money -

The un­prece­dented boom in China’s $3-tril­lion cor­po­rate bond mar­ket is start­ing to un­ravel.

Spooked by a fresh wave of de­faults at state-owned en­ter­prises, in­vestors in China’s yuan-de­nom­i­nated com­pany notes have driven up yields for nine of the past 10 days and trig­gered the big­gest sell­off in on­shore junk debt since 2014. Lo­cal is­suers have can­celled 61.9 bil­lion yuan ($9.6 bil­lion) of bond sales in April, and S&P’s is cut­ting its as­sess­ment of Chi­nese firms at a pace un­seen since 2003.

While bond yields in China are still well be­low his­tor­i­cal av­er­ages, a sus­tained in­crease in bor­row­ing costs could threaten an econ­omy that’s more re­liant on cheap credit than ever be­fore. The num­bers sug­gest more pain ahead: Listed firms’ abil­ity to ser­vice their debt has dropped to the low­est since at least 1992, while an­a­lysts are cut­ting profit fore­casts for Shang­hai Com­pos­ite In­dex com­pa­nies by the most since the global fi­nan­cial cri­sis. “The spread­ing of credit risks is only at its early stage in China,” said Qiu Xin­hong, a money man­ager at First State Cinda Fund Man­age­ment Co. “Many peo­ple have turned bear­ish.” Eco­nomic fig­ures for March re­veal a g row­ing de­pen­dence on debt. China’s ag­gre­gate fi­nanc­ing al­most dou­bled from a year ear­lier to 2.34 tril­lion yuan, ex­ceed­ing all 24 fore­casts in a Bloomberg sur­vey.

Yet even that wasn’t enough to save the seven Chi­nese com­pa­nies that re- neged on bond obli­ga­tions this year. Three were part-owned by China’s govern­ment, seen not long ago as a provider of im­plicit guar­an­tees for bond­hold­ers. Dong­bei Spe­cial Steel Group on April 13 missed a third pay- ment,whileChi­na­coalGroupShanxi Huayu En­ergy failed to make a dis­tri­bu­tion on April 6. There­ac­tion­has­beenswift­inChina’s 18.8tril­lionyuan­cor­po­rate­bond­mar­ket.The­ex­trayield­in­vestors­de­mand to hold seven-year on­shore cor­po­rate bonds with top rat­ings over sim­i­lar­ma­tu­rity govern­ment notes has jumped by 28 bps to 91 bps as of Mon­day. At least 64 firms have post­pone­dorscrapped­planned­note­sales.

“To Chi­nese in­vestors at the mo­ment, de­fault risks are high al­most every­where,” said Shi Lei, the head of fixed-in­come re­search at Ping An Se­cu­ri­ties Co. The yield pre­mium on cor­po­rate bonds will prob­a­bly rise by 30 to 50 bps over the next sev­eral months, Shi said.

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