Cash crunch hits China's dollar bonds
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.
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.
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.