Bloomberg News

Chinese Banks’ Bond Risk Rises Most in Asia Amid Moody’s Warning

June 24, 2013

Bank of China Ltd. (3988), Export-Import Bank of China and China Development Bank Corp. led gains in Asian bond risk last week as Moody’s Investors Service warns credit curbs could threaten small and mid-sized lenders.

Prices of swaps tied to Bank of China, the nation’s fourth-largest lender, rose 70.4 basis points last week to 192.4, the biggest increase among members of the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan, according to data provider CMA. The cost of insuring Asian corporate and sovereign bonds from default surged 27.6 basis points last week, the most since November 2011, CMA prices show.

CDB, the nation’s biggest policy lender, scrapped a bond sale as the People’s Bank of China said today that lenders must control liquidity risks from credit expansion. The country’s worst cash crunch on record last week sent the one-year yield on AAA corporate debt to 5.17 percent, the highest since November 2011. The PBOC’s methods of limiting liquidity threaten small and medium-sized banks that are more dependent on the interbank market, Moody’s wrote in a report today.

“Non-performing loans are likely to rise more rapidly in the coming months as weaker borrowers find refinancing conditions more challenging,” Bin Hu, senior analyst at Moody’s, wrote in the report. “Another risk is that the PBOC’s actions will make banks more nervous about each other’s creditworthiness.”

The gauge of Asian bond risk advanced 7 basis points to 166 basis points as of 8:39 a.m. in Hong Kong today, Australia & New Zealand Banking Group Ltd. (ANZ) prices show.

Yield Rise

The average premium that Chinese issuers pay to sell U.S. dollar-denominated bonds rose for a third consecutive week in the period to June 21, the longest streak since that ending March 29, according to the JPMorgan Chase & Co. indexes. Yields on Bank of China’s 5.55 percent subordinated bonds due February 2020 soared 43 basis points to 4.74 percent, the biggest weekly gain since August 2011, Bloomberg prices show.

Interbank lending rates spiked last week as the monetary authority refrained from using open-market operations to address a cash crunch in the world’s second-largest economy. The central bank later used reverse-repurchase agreements to inject funds into selected banks, financial news website Hexun reported June 21, citing an unidentified person close to the PBOC. Banking system liquidity is at reasonable levels, the central bank said in an announcement on its website today.

Fitch Cautions

Persistent tight liquidity could constrain the ability of some banks to repay maturing wealth-management products, Fitch Ratings cautioned last week. Still, curbing credit growth to prevent a build-up of excessive leverage is good for China’s banking system overall, Moody’s wrote in its report.

The Markit iTraxx Australia index climbed 4 basis points to 143 basis points as of 10:24 a.m. in Sydney, according to National Australia Bank Ltd. The measure is on course for its highest close since November 19, after advancing 14.8 basis points last week, the most since the period ended March 22, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Japan index rose 1 basis point to 117 as of 9:52 a.m. in Tokyo, Citigroup Inc. prices show. The gauge is on track for its highest close since March 5, according to CMA.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

To contact the reporter on this story: Rachel Evans in Hong Kong at revans43@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net


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