One little-known Chinese bank in Liaoning province is making the cost of capital more expensive for hundreds of other lenders
- The yield of Bank of Jinzhou’s loans soared to 21 per cent from 5.5 per cent, before settling back at 11.4 per cent this week
- The roller-coaster ride for bond buyers is a stark reminder of the risks of investing in China’s credit markets
Just two years ago, a little-known Chinese lender could raise capital from global investors at a yield of 5.5 per cent, only 1 percentage point more than the debt of the nation’s leading retail bank, Postal Savings Bank of China.
The roller-coaster ride for bond buyers is a stark reminder of the risks of investing in China’s credit markets. Growing market concern about smaller lenders has pushed up bond spreads to levels where it may not make economic sense for banks to buy back callable capital notes at the first opportunity they can, contrary to the expectations of investors when they first got into the debt. That’s putting further downward pressure on the bank bonds, at a time when investors are no longer counting on an implicit government guarantee for every Chinese financial institution.
“There is definitely still some concern of smaller Chinese banks not calling their Additional Tier 1 securities,” said Nicholas Yap, desk analyst at Nomura International. There’s a “fundamental divergence” between big Chinese lenders and smaller banks, and that is likely to “persist going forward,” he said.
Amid the turmoil, smaller Chinese lenders are finding it harder to raise funds. Investors are going to demand “a lot” of premium for small banks to issue bonds offshore, meaning that funding channel for capital debt is “pretty much closed” for them, according to Arthur Lau, head of Asia ex-Japan fixed income at PineBridge Investments. That’s a potential negative factor for China’s slowing economy because those lenders are a key source of credit to small and medium-sized companies.
Bank of Jinzhou didn’t immediately respond to an email requesting comment.