Cash crunch hits China's dollar bonds
The mainland's top-rated US-dollar-denominated bonds are losing more than those of any other leading emerging market as a record cash crunch threatens to slow economic growth and strain corporate finances.
Chinese notes, the only gainers in March as debt from Brazil, Russia and India slumped, lost 6.1 per cent in the past quarter, the most in Bank of America Merrill Lynch indices since 1999. China Petroleum & Chemical Corp and CNOOC led losses.
Corporate debt tumbled as People's Bank of China governor Zhou Xiaochuan tolerated overnight borrowing rates surging to the highest level since at least 2003, fuelling concerns over non-payment as the authorities struggle to rein in risky lending.
The premium investors demand to hold Chinese dollar debt surged to a 10-month high at 225 basis points on June 26, even after US Treasury yields jumped on the Federal Reserve's plans to taper its stimulus.
"We see the ongoing liquidity tightness in China as ultimately having an impact on growth rates, and having further effects on the cost of borrowing, companies' access to funds locally and how much they may have to borrow offshore," said Krishna Hegde, the head of Asia credit research at Barclays. "It's negative for existing dollar bonds of Chinese corporates."
Chinese notes that have a BBB-minus grade or higher from Fitch Ratings and Standard & Poor's, or the equivalent Baa3 from Moody's Investors Service, underperformed their peers in other major emerging nations.
Company debt with similar ratings fell 5.3 per cent in the past quarter in Brazil, 3.9 per cent in India and 3.3 per cent in Russia, the Bank of America Merrill Lynch indices show.
Zhou said last week that China would maintain market stability and adjust policies at the right time, his first comments since the borrowing rates surged. The mainland's overnight repurchase rate leapt to 12.85 per cent on June 20, the most since 2003. It was at 5.05 per cent on Friday, more than double the average of 2.32 per cent in the past five years.
"While bearish sentiment on the liquidity situation appears to be easing off somewhat after statements from the PBOC, the overall situation needs to be looked at in the context of the broader credit markets, which still remain relatively weak," said Kaushik Rudra, the global head of credit research at Standard Chartered.
Declines in Chinese investment-grade notes also surpassed those for their lower-rated counterparts, which lost 3.8 per cent in the past quarter, according to Bank of America Merrill Lynch data.
High-grade bonds "are attractively valued relative to fundamentals", said Chia Tse Chern, the head of Singapore and Asia fixed income at UOB Asset Management. "However, we need to see a stabilisation of the US Treasury yield before the Chinese investment-grade credits can recover."
The yield on treasuries due in a decade jumped more than a percentage point from this year's low of 1.61 per cent on May 1 to as high as 2.66 per cent on June 24, after Federal Reserve chairman Ben Bernanke's comments on the tapering of stimulus measures.