Offshore yuan bond yields hit record high as China default risk weighs
China’s fledgling offshore yuan-denominated “dim sum” bond market is suffering one of its sternest tests in the five years since a wave of deregulation in 2010 triggered a flood of issuance.
Stretched finances at mainland property developers – some of the biggest dim sum bond issuers – and increased two-way volatility in the previously steadily strengthening yuan currency that has seen it lose some 2.8 per cent since its peak in January 2014, have started to spook foreign investors.
The most recent Bank of America/Merrill Lynch Fund Manager Survey reckons 19 per cent of global investors currently rank China debt default risk as the highest in the world. The survey was conducted among more than 207 managers with a combined US$565 billion of assets under management between March 6 and March 12.
The market is still looking for a further currency correction
A Jefferies report showed that emerging market bond funds witnessed the first capital outflow in six weeks during the week between March 5 and March 11. Sovereign and Quasi-sovereign bonds represent over 60 per cent of China’s onshore bond market.
Dim sum yields have spiked to record peaks as foreign investors have demanded a higher premium for the risks they are holding, adding roughly 60 basis points to average yields over the past three months to a record high of 4.9 per cent, according to the HSBC CNH Index.
“The extra yield required by investors to hold bonds issued by Time Property, China SCE and Evergrande Real Estate Group have reached new highs,” Simon Colvin, an analyst at data provider, Markit, told the South China Morning Post.
Previous periods of rising yields have typically seen foreign investors lapping up the move, especially when dim sum debt traded at a yield premium to the same issuer’s US dollar or euro notes.