Govt crack­down spells more pains for Chi­nese cor­po­rate bonds

New Straits Times - - Business -

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

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