Govt crackdown spells more pains for Chinese corporate bonds
BEIJING: The worst may not be over for Chinese corporate bonds as the government pushes ahead with its campaign to reduce leverage in the debt market, according to investors including Invesco Ltd.
The crackdown on the use of borrowed money to invest in financial assets has led to Chinese companies cancelling 184 billion yuan (RM116.81 billion) of bond sales this quarter, set for the most in a year.
The extra yield on “AA” rated company bonds due in five years over similar-maturity government securities rose to the highest since 2015 this month.
Invesco said corporate debt premiums still aren’t big enough to reflect rising default and liquidity risks.
China is struggling to cut the nation’s enormous debt pile without destabilising the bond and equity markets. As growth slows in China, the central bank boosted cash injections this week.
Bond yields surged and stock declined in recent weeks, after regulators overseeing banking, insurance and securities trading issued directives, targeting everything from excessive borrowing to speculation in equities.
“While such coherent tightening of policy is positive for China’s economy and capital markets in the medium to long term, it will lead to short-term pains,” said Ken Hu, chief investment officer of Asia-Pacific fixed income at Invesco Hong Kong Ltd.
Hu expects bond yields to continue to rise as default rates in China will possibly increase for the next six to 12 months.
Chinese firms and banks face three trillion yuan in bond repayments this quarter. Four firms have defaulted since March 31.
The one-year Shanghai interbank offered rate, a gauge for borrowing costs in China, has jumped 91 basis points this year to 4.28 per cent, the highest level since May 2015.
The yield premium of five-year “AA” rated corporate bonds over government notes widened 24 basis points this quarter to 201 basis points on May 15, the highest since October 2015.
China’s corporate debt was 116 trillion yuan as of the end of last year, accounting for 156 per cent of the nation’s gross domestic product, according to Bloomberg estimates. Bloomberg