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Top Fund Favors Corporates as Slowdown End Seen: China Credit

October 11, 2012

Top Fund Favors Corporates as Slowdown Seen Ending

Inflation was 1.9 percent last month, according to the median forecast in a Bloomberg News survey before a report on Oct. 15. Consumer prices climbed 2 percent in August as increased grain costs fed into pork prices. Photographer: Nelson Ching/Bloomberg

China’s top-performing bond fund manager predicts corporate debt will outperform government notes as economists have overestimated the need for monetary easing to revive the economy.

Wanjia Asset Management Co., which oversees 29.7 billion yuan ($4.7 billion) of assets, said growth may rebound to as much as 7.6 percent and inflation may exceed 2 percent in the final three months of 2012. In the third quarter, the economy expanded 7.4 percent, the slowest in 42 months, according to a Bloomberg survey of 35 analysts before a report next week.

“It may be difficult for the economy to have a decent rebound this year, but at least the good thing is that it won’t slow further in the fourth quarter,” said Zou Yu, head of fixed income in Shanghai at Wanjia, whose Wanjia Tianli Bond Fund B (150038)’s net asset value per unit increased 51 percent in the past year. “The probability of a cut in interest rates or reserve requirement ratio is very small this year.”

Bets on a recovery have driven the 10-year sovereign yield four basis points higher to 3.50 percent this this month, even as the Asian Development Bank and the International Monetary Fund cut their 2012 growth estimates. Similar-maturity debt yields 8.08 percent in Russia, 8.16 percent in India and 9.64 percent in Brazil. Zou’s forecast contrasts with the median for a 1 percentage point cut in banks’ reserve requirements this year, according to a separate survey of 14 economists.

The yield on one-year government debt fell two basis points in October to 2.77 percent, after rising 45 basis points last quarter, Chinabond data show. The rate on similar-maturity corporate bonds dropped three basis points to 4.16 percent, after gaining 75 basis points in the previous three months.

Room to Stimulate

Premier Wen Jiabao said on Sept. 11 the nation has room for fiscal and monetary measures to support growth and will meet this year’s economic goals. The central bank lowered the benchmark deposit and lending rates by 25 basis points in June and July. The rate cut in June was the first since 2008.

“An interest-rate cut can’t be excluded by the end of this year, said Lu Xin, a bond fund manager in Shanghai at Everbright Pramerica Fund Management Co., which manages 23 billion yuan of assets. “The high funding costs are hurting local companies and ultimately the economy.”

He said it was “risky” to invest in low-rated bonds as the economy slows.

Money-Market Signals

The central bank has kept the reserve requirement ratio unchanged at 20 percent since a second reduction this year in May and has relied on reverse repurchase contracts to inject capital into the financial system. Yesterday, it kept the yield on seven-day reverse repos unchanged at 3.35 percent for a sixth sale, higher than the one-year deposit rate of 3 percent.

“The central bank’s action of keeping seven-day reverse repo rate higher than the one-year deposit rate is sending a clear signal that it’s not necessary to further lower benchmark interest rates,” said Zou.

Inflation was 1.9 percent last month, according to the median forecast in a Bloomberg News survey before a report on Oct. 15. Consumer prices climbed 2 percent in August, compared with 1.8 percent in July, as increased grain costs fed into pork prices. The statistics bureau is due to release gross domestic product data on Oct. 18.

Rebalancing Economy

“The government’s ultimate task is to rebalance the economy,” said Zou, whose fund was the best among the 226 tracked by Bloomberg. “If the central bank cuts reserve ratios or interest rates, that will bring down social borrowing costs and help those inefficient companies to survive,” which would be counter to the rebalancing goal, he said.

Zou said he favors corporate bonds with shorter maturities because of the stabilizing economy and the benchmark 10-year government yield may rise in the fourth quarter. China State Grid Corp. sold 10 billion yuan of three-year bonds at 4.39 percent yesterday, higher than the 4.15 percent when it sold similar maturity debt on Aug. 15.

Five-year credit-default swaps protecting sovereign notes fell three basis points this month to 85 basis points in New York, after a 35 basis-point drop in the July-September period, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements.

China’s economic growth is poised to recover after the country’s once-in-a-decade leadership transition, Mark McCombe, Asia-Pacific chairman of BlackRock Inc. (BLK:US), the world’s biggest money manager, told Bloomberg Television on Oct. 10. The Chinese Communist Party will hold a congress starting Nov. 8, which will feature the power handover.

The yuan rose as much as 0.2 percent to 6.2654 per dollar today, the strongest since 1993, on speculation policy makers will act to revive growth.

“I am not quite optimistic about the bond market because it lacks support from economic fundamentals,” said Zou. “But it will take some time to judge if the stabilization in the economy can be sustained in the first and second quarter.”

--Judy Chen. Editors: Sandy Hendry, Shelley Smith

To contact Bloomberg News staff for this story: Judy Chen in Shanghai at

To contact the editor responsible for this story: James Regan at

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