Top-rated companies on the mainland are paying the lowest premiums to sell debt in nearly 27 months, showing investor confidence in state-backed firms even as the overall economy flags.
The extra yield investors demand to hold AAA notes due in three years over similar-maturity government bonds fell to the lowest since February 2011 at 116.5 basis points on May 17, and remains near that level at 121, down 38 this year.
Aluminum Corp of China, the country's biggest producer of aluminium, sold February 2014 debt at 3.75 per cent last month. That is less than the central bank's 6 per cent one-year benchmark lending rate and the 3.91 per cent average yield on all corporate debt in emerging Asia, according to Bank of America Merrill Lynch.
The appeal of lower-risk debt of larger state-owned enterprises is growing as data shows a twin-speed economy. The official Purchasing Managers' Index for smaller companies fell to 47.3 in May from 47.6 in April, even as the broader gauge rose to 50.8 from 50.6.
The nation's bond risk surged to a nine-month high and dollar note yields have jumped on concerns that policymakers will struggle to revive expansion while reining in debt.
Shao Jiamin, the Shanghai-based head of fixed income at HFT Investment Management, said: "At a time when recovery remains weak, investment-grade bonds are still preferred by many investors, including us. There aren't many profitable investment channels out there at the moment."
The average yield on AAA-rated debt due in 10 years sold by mainland companies has declined 24 basis points since December 31 to 5.05 per cent. It touched 5.04 per cent on May 30, the lowest since October. The yield on the benchmark 10-year government bond has fallen only 11 basis points in the same period, narrowing the spread to 158, near the lowest since November. The yuan was little changed at 6.1278 per dollar yesterday.
Premier Li Keqiang said last month that China is confronted by "huge challenges" as it seeks 7 per cent annual growth this decade, down from more than 10 per cent in the previous 10 years. The comments came days after President Xi Jinping said the nation would not sacrifice the environment to ensure short-term expansion.
Investors have preferred top-rated debt as authorities scrutinised irregular bond trading in an attempt to clean up a market that has doubled over five years. Corporate bond sales that include securities approved by the nation's regulator have slumped to 136.7 billion yuan this quarter from 426.7 billion yuan in the previous three months.
The central bank has also drained money from the economy through repurchase agreements and bill sales as it reins in credit to prevent a run-up in asset prices.