Bloomberg News

Dollar Bonds Best of Emerging World as Wen Acts: China Credit

October 27, 2011

Oct. 28 (Bloomberg) -- China’s dollar-denominated corporate bonds are providing the highest returns among emerging markets this month on signs policy makers are acting to shield the economy from slowing global growth and increasing defaults.

Corporate debt gained a record 11.9 percent in October, beating the previous monthly high of 10.5 percent in November 2008 and following the 19 percent loss in August and September, according to JPMorgan Chase & Co. indexes. Chinese debt returned more than Indonesia, the second-best performer among the 35 developing nations tracked by JPMorgan at 9.9 percent and more than twice as much as company bonds of Russia, India and Brazil, the data show.

Regulators indicated this month they would boost access to credit for small business and allow local-government financing vehicles to roll-over loan repayments to ease financial pressures in the world’s fastest-growing major economy. Chinese industrial production outpaced analysts’ estimates last month and concern is easing that exports will slump as European leaders move closer to a solution for their debt crisis.

“The market priced in excessive concern about a hard landing in China which dissipated after the release of recent economic data,” said Becky Liu, a Hong Kong-based strategist at HSBC Holdings Plc. “The latest Chinese economic figures were not as bad as some people feared.”

Rising Production

China’s dollar bonds returned more than three times as much as Brazilian notes at 3.7 percent, while debt in Russia earned 5.9 percent and India’s returned 4.8 percent, according to JPMorgan indexes. Notes issued by Chinese real estate companies Longfor Properties Co Ltd. and Yanlord Land Group Ltd. increased 31 percent and 33 percent, according to data compiled by Bloomberg.

Industrial production in China grew 13.8 percent in September from a year earlier, exceeding the median estimate of 20 analysts surveyed by Bloomberg, according to figures published this month. Brazil’s industrial production grew 1.8 percent in August from a year earlier, below the 2.2 percent median estimate of 35 strategists surveyed by Bloomberg before the release. India’s August and Russia’s September output both missed expectations, according to Bloomberg surveys.

China may cut the amount banks are required to keep in reserve before the end of this year and reduce interest rates in the second quarter of 2012 to boost lending to small companies, according to Guotai Junan Securities Co. as Premier Wen Jiabao said on Oct. 22 that economic policy will be fine-tuned as needed. China’s Ministry of Industry and Information Technology also said on Oct. 26 that it will work to help small businesses facing difficulties.

Roll Over Loans

Local-government financing vehicles may be allowed to roll over their loans to ease payment pressure, Zhou Mubing, the vice chairman of the China Banking Regulatory Commission, said at a conference on Oct. 24 organized by internet portal Sina.com, according to a transcript on its website.

Bonds of Brazil, India and Russia suffered less than China in August and September’s global sell-off that drove down returns. Brazilian debt lost 6.6 percent of its value while Indian and Russian bonds dropped 8.2 percent and 8.5 percent, according to JPMorgan indexes. Indonesia lost 15 percent and China’s dollar bonds plummeted 19 percent over the same two months, the data show.

“The sell-off in September was most severe in the dollar space so the rise in returns this month is just an equalization process,” Ronald Chan, managing director of fixed income at Manulife Asset Management, said in a phone interview on Oct. 24. Manulife has $217 billion of assets under management globally, according to its website.

Rate Rises

The pace of expansion in industrial output may decline this quarter and next year, Xiao Chunquan, director general of the Industry Ministry’s monitoring department, said at a briefing in Beijing on Oct. 26. Europe’s debt crisis, elevated unemployment in developed nations and rising labor costs will contribute to the drop, he said.

The People’s Bank of China has refrained from raising benchmark borrowing costs since July, the longest pause since they started increasing rates in October last year to rein in consumer and housing prices. Banks’ reserve requirements were boosted nine times from November to June to a record 21.5 percent for the biggest lenders. Bank lending dropped to the least since 2009 last month.

More Leeway

China’s benchmark money-market rates fell this month on speculation easing inflation will give the central bank more leeway to loosen monetary policy. The seven-day repurchase rate, which measures interbank funding availability, fell 46 basis points, or 0.46 percentage point, to 4.5618 percent in October. The one-year swap contract, the fixed cost needed to receive the floating seven-day repurchase rate, slipped 4 basis points to 3.710 percent at 9:14 a.m. in Beijing today.

Yields on the government’s 10-year bonds reached a three- year high of 4.13 percent on Aug. 30 and were little changed at 3.8 percent yesterday, Chinabond data show. The yuan was little changed against the dollar, at 6.3595 yesterday in Shanghai, versus 6.3533 the previous trading day, according to the China Foreign Exchange Trade System. The currency has advanced 3.8 percent against the dollar this year, the third-best performance of the 25 emerging-market currencies tracked by Bloomberg.

“Chinese national debt-to-GDP ratio is still quite low, and the government also owns a lot of assets,” including banks, state-owned enterprises and land, and is in a strong fiscal position, Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd., said at the Bloomberg Link China Conference in Hong Kong on Oct. 25. “With such a wealthy government, it’s very difficult to think that China will fall into a hard landing or experience a hard crisis.”

Default Swaps

China has the world’s largest foreign-currency reserves at $3.2 trillion and its debt was equal to 19 percent of gross domestic product last year, according to U.S. government data. Russia’s is the lowest of the so-called BRIC nations at 9 percent.

The cost of five-year credit-default swaps on China’s sovereign debt has dropped 82 basis points this month to 117 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower renege on their debt and are also used to speculate on bond prices.

European Plan

Europe took steps to tackle its sovereign default risk, pushing down the cost of insuring euro area debt as investor confidence grew that Greece would meet its looming bond payments and national leaders would agree a rescue fund for defaulting EU members.

Portugal and Ireland have debt-to-GDP ratios of more than 90 percent. The cost of insuring Portugal’s sovereign bonds against non-payment fell 8 basis points this month, after rising 202 basis points in September, according to CMA. Ireland’s five- year credit-default swaps dropped 134 basis points from the September peak of 913.7 on Sept. 12.

European leaders finalized 50 percent writedowns on Greek debt yesterday, a 1 trillion euro ($1.4 trillion) rescue fund and a bank recapitalization plan to boost core capital to 9 percent. The U.S. economy grew in the third quarter at the fastest pace in a year at 2.5 percent, from 1.3 percent in the second quarter, government data released yesterday showed.

“Asia will not be decoupled from a slowdown in the U.S. or a European recession,” Annisa Lee, a Hong Kong-based credit analyst at Nomura Holdings Inc., said in a phone interview yesterday. “But if people are more optimistic toward the sovereign debt crisis in Europe, investment sentiment may further improve and Asian U.S. dollar bonds including the Chinese bonds can go even higher than current levels.”

--Editors: Shelley Smith, Sandy Hendry

To contact the reporters on this story: Rachel Evans in Hong Kong at revans43@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net


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