Bad loans widen yield spread between China policy banks, government debt
Yields on debt sold by China policy banks jump amid economic slowdown and liquidity squeeze
Borrowing costs at the mainland's policy banks are the highest in more than a year relative to those at the government as a slowdown in the economy fans concern that bad loans will climb.
The average yield on one-year debt sold by the three lenders - China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China - was 74 basis points higher than comparable sovereign notes on July 25, the biggest gap since March 2012. That compares with this month's low of 41 basis points on July 10 and precedes 52 billion yuan (HK$65.8 billion) of debt sales by China Development Bank and Exim Bank yesterday and today.
Premier Li Keqiang is seeking to contain financial risks as reforms aimed at tackling income inequality and pollution put the economy on track for the slowest annual expansion in 23 years. Bad loans at mainland lenders increased for a sixth quarter in the three months to March, the longest deterioration streak in at least nine years, and policymakers announced on July 28 a national audit of local governments amid concern that some might struggle to repay borrowings.
"Loan default is something we are worried about," said Chong Wee Khoon, a Societe Generale strategist in Hong Kong. "The rise in bank bond yields is driven by a liquidity squeeze as well. Money is at a premium and investors demand higher yields."
China Development Bank was to sell one-, three-, five-, seven- and 10-year bonds yesterday, according to a statement posted on the government's bond clearing house website. The sale comprises 6 billion yuan of each tenor. Exim Bank planned to sell 15 billion yuan of seven-year debt and 7 billion yuan of two-year bonds today, it said.
Policy banks accounted for 34 per cent of the 25 trillion yuan of outstanding debt on the mainland at the end of June. At least five companies, including China Development Bank, cancelled or delayed scheduled bond sales of about 32.1 billion yuan last month when money-market rates climbed to a record amid a crackdown on speculative short-term financing.
"The supply is coming back," said Zhang Zhiming, head of China research at HSBC in Hong Kong. "In June, there was little issuance and sales this month are overwhelming. And concerns over loan default are always there."
Zhang forecast yields would rise further unless the central bank injected funds into the financial system.