China Attracts Foreign Debt Buyers Amid Corporate Default Fears
HONG KONG – Global investors are turning to Chinese bonds after a temporary sell-off and are looking for safer alternatives beyond sovereign debt to exploit higher yields and boost yields.
Bonds issued by Chinese “political banks” are gaining more and more attention, channeling public funds into areas such as trade, infrastructure and agriculture. The banks in question – the Development Bank of China, the Agricultural Development Bank of China, and the Import-Export Bank of China – are state-owned and are considered to offer a low level of quasi-sovereign risk, while always offering higher yields than bonds. issued directly by the Chinese government.
Several fund managers told Nikkei Asia they believe foreign ownership of Chinese bank bonds will double in the next few years, after surpassing 1 trillion yuan ($ 156 billion) for the first time in April.
“Foreign investors are now comfortable with Chinese government bonds and are now moving down the curve towards strategic bank bonds. It’s a shift in risk appetite, ”said Jason Pang, Hong Kong-based portfolio manager at JP Morgan Asset Management.
Global investors are expected to strengthen their holdings in China’s bond market, the second largest in the world, as the country opens up and it adds to more global bond indices. China’s inclusion in the FTSE World Government Bond Index, which is expected to start in October, is on its own to generate up to $ 150 billion in passive financial flows, analysts say.
The offers are higher yields than US bonds. For example, Chinese 10-year benchmark bonds return 3.089% versus 1.576% for their US counterparts.
Bond yields from policy banks are an additional 50 to 60 basis points higher, despite a similar credit rating of A1 or A + from international rating agencies. They “are offering a free lunch to investors due to the surge in yields,” said Yii Hui Wong, senior portfolio manager at Nikko Asset Management.
Chinese debt has been the focus of concern in recent months after a spate of defaults by state-owned companies since late last year. China Huarong Asset Management, the country’s largest bad debt manager and majority-owned by the finance ministry, is the latest to sound the alarm. The company has failed to file annual profits on time and is reportedly looking to state-owned banks to meet bond maturity, although it has yet to default.
Investors still prefer corporate bonds issued in the offshore market, as they tend to be more liquid than their onshore counterparts and have credit ratings issued by S&P Global Ratings and Moody’s Investors Service.
Even though they are onshore, public bank bonds are considered less risky than corporate debt. “A key differentiator for policy bank bonds is that they tend to have the same risk profile as Chinese government bonds,” Pang said. “This makes them quite distinct from other SOE bonds. As a result, we don’t see much impact on the market prices related to Huarong.”
Foreign investors resumed their net purchases of Chinese bonds in April after a surprise drop in March. The drop – the first monthly net drop since February 2019 – came as the yield premium on Chinese bonds to US Treasuries narrowed, while the country also curbed appetite by announcing plans to higher than expected debt sales.
Investors returned after spreads widened to 19 basis points in April and the yuan recorded its longest winning streak against the US dollar in seven months.
Foreign holdings of Chinese government bonds rose 2.5% from the previous month to a record 2.096 billion yuan at the end of April, according to data from China Central Depository & Clearing Co Foreign ownership of government bonds has doubled in the past two years.
Global investors now hold 10% of Chinese government bonds, compared to 4% of debt issued by political banks, according to CCDC data. This is seen to increase to 15% and 10% respectively in the next three years by investors, including JP Morgan Asset Management.
Chinese government and bank bonds were first included in the Bloomberg Barclays Global Aggregate Bond Index in April 2019 and the country’s weighting has been gradually increased. JPMorgan’s government bond index, emerging markets, began to include bonds from February of last year.
“We love high-quality public policy bank bonds,” said Arthur Lau, head of fixed income Asia-ex-Japan at PineBridge. A combination of central government bonds and political bank bonds “is the way to go, especially for investors who are not familiar with this market,” Lau said.
Chinese government bonds and government bank bonds together account for one-third of the $ 18 trillion yuan onshore bond market. Local government bonds account for a fifth, with the remainder coming from corporate certificates of deposit and credit, according to data compiled by PineBridge.
The country’s stock market, which fell into corrective territory in March amid fears of monetary tightening, rising global inflation and a regulatory crackdown on tech stocks, has again witnessed foreign buying.
On Tuesday, foreign investors bought a record 21.7 billion yuan of yuan-denominated shares listed in China through the equity connection program that links Hong Kong to mainland stock exchanges.
The CSI 300 index, which tracks the largest listed stocks in Shanghai and Shenzhen, rose 5.3% since March 31 and recorded the biggest gain in nearly a year on Tuesday.