The equity rout has been a boon to China’s bond market. As fears linger over stocks, yield-hungry capital has headed into bonds, building a bubble that analysts say cannot be sustained. China’s prodigious bond market, the third-largest in the world after US and Japan, has been aided by several factors and started to take off this year.
Loosening curbs on companies issuing papers, a local-government debt swap plan that propelled bond issuances, and rounds of monetary easing by the central bank have increased the allure and variety of fixed income products. Eventually, the stock market crash in June that saw funds unwind positions pressed the button on the bond party.
“In many ways, this is like a perfect storm,” said Zhou Hao, an analyst at German lender Commerzbank, referring to the phenomenon in which a rare combination of factors significantly magnify the trends in the market.
“To some extent, authorities hope to see a thriving bond market, similar to how they pinned hopes on the stock market before,” Zhou said.
In the first three quarters of this year, net bond issuance amounted to 8.7 trillion yuan, 67 per cent higher than the same period last year. The most preferred type, and likely the most precarious one, is corporate bonds issued and traded at stock exchanges, which gained momentum since authorities lifted the ban on property developers tapping domestic bond markets last December.
“There have been few choices beyond bonds to invest since June. The bond market, especially corporate bonds, saw leverage grow rapidly between July and August,” said a source at a leading mainland brokerage.
The most popular way of fixed-income investments has been through pledged repurchases, or repos. In a typical transaction, an investor uses original funds to buy an initial batch of notes, and pledge part of that to a lender at a set period for a set interest rate, or repo rate, in exchange for additional capital. The additional funds in turn are used to buy more bonds. The process could repeat for up to 10 times, Zhou said.