Sunday, January 23, 2011

Chinese Corporate Bond Sales Have Busiest Start on Record

Chinese companies raised four times more from bonds than from equities this year in a record start for the debt market as government efforts to curb inflation curbed access to loans and the stock market.

Corporate bond sales totaled 100 billion yuan ($15.2 billion) since Jan. 1, up 68 percent from a year earlier and the most since Bloomberg started tracking the data in 1999. Domestic currency share sales in 2011 total 23.5 billion yuan, down from 34 billion yuan a year earlier, data compiled by Bloomberg show.

“Regulators have strengthened their control over the amount of loans,” said Chen Jianbo, a Beijing-based fixed- income analyst at BOC International, a unit of Bank of China Ltd. “This has put an obstacle in the way of companies getting loans. On the other hand the regulators are encouraging direct financing, especially debt financing.”

Slumping equity prices and restrictions on loan growth mean that bonds have become the only option for many companies to raise funds. The Shanghai Composite Index slumped 13 percent in the past year, the worst performer among benchmark measures in the 10 biggest equity markets tracked by Bloomberg. Fixed-income fund managers avoided losses as yuan corporate bonds returned 3.1 percent in the same period, according to the Bank of America Merrill Lynch China Corporate Index.

Debt sales have been led this year by companies such as China National Petroleum Corp., the country’s biggest oil and gas producer, which has issued 30 billion yuan of notes through four sales, and Beijing-based Huaneng Power International Inc., a unit of China’s biggest electricity producer, which has completed one sale of 5 billion yuan, according to data compiled by Bloomberg.

Beating Rate Rises

Chinese firms may be selling bonds on expectations that interest rate rises in the coming months will boost their borrowing costs, according to Wu Tianshu, a Beijing-based fixed- income analyst at China Galaxy Securities Co. “As long as the economy keeps growing there will be more demand for debt financing,” he said.

Yields on 10-year AAA corporate bonds have climbed 1.05 percentage points from last year’s low on Aug. 20 to 5.19 percent, according to data compiled by Bloomberg. Similar- maturity government yields climbed 72 basis points in that period to 4 percent, a spread of 119 basis points.

The yield on the 2.68 percent government bond due November 2013 rose two basis point, or 0.02 percentage point, to 3.40 percent on Jan. 21, Chinabond prices show. The yield on India’s three-year bonds is 8.31 percent, while similar-maturity bonds yielded 7.03 percent in Russia and 12.77 percent in Brazil.

China’s benchmark money-market rate has surged to the highest since October 2007 as lenders ran short of cash after the central bank’s four increases in their reserve requirements in the past three months.

Cash Crunch

The seven-day repurchase rate, which measures money availability between banks, climbed 127 basis points to 7.3 percent, according to the daily fixing rate of the National Interbank Funding Center in Shanghai on Jan. 21, after reaching 8.8 percent earlier that day. China reported Jan. 20 its economy grew at a faster-than-expected 9.8 percent in the fourth quarter from a year earlier, and inflation averaged 3.3 percent in 2010, breaching the government’s goal.

The one-year interest-rate swap, the fixed cost needed to receive the floating seven-day repo rate, jumped 37 basis points last week to 3.64 percent.

Chinese new bank loans fell for three straight months to 480.7 billion yuan at the end of December, down from 563.97 billion yuan a month earlier, and a year-high of 1.39 trillion yuan last January, government data show. Regulators set a 7.5 trillion yuan annual limit on bank lending last year following the record 9.59 trillion yuan of new lending in 2009.

‘Abnormal’ Loan Growth

Premier Wen Jiabao pledged last week to prevent “abnormal” loan growth. The People’s Bank of China raised reserve ratios for lenders effective Jan. 20 to slow inflation that reached a 28-month high in November. The central bank also raised the benchmark one-year lending rate by 25 basis points to 5.81 percent Dec. 25.

The government may raise interest rates by another 25 basis points, as early as next month, Wensheng Peng, a China International Capital Corp. economist, wrote in a Jan. 21 report. This may be followed by another increase in the second quarter, Peng wrote.

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, has fallen 3.3 percent this year after plunging 14 percent in 2010.

Stock Markets

“Valuation for IPOs needs to be lower to reflect weak market sentiment,” said Wang Yang, director of fixed-income research at the China unit of UBS AG in Beijing, referring to initial public offerings on nation’s stock markets. “Regulators may also consider slowing down new issuance to ease supply pressure in such a weak market.”

Five-year credit-default swaps on the nation’s bonds have risen nine basis points this year to 77 basis points on concern economic growth that’s averaged more than 10 percent over the past five years will be derailed on anti-inflation measures. The swaps protect debt against default and traders use them to speculate on credit quality. An increase in price suggests deteriorating perceptions of creditworthiness.

Yuan Strength

The yuan traded near a 17-year high on Jan. 21 after the U.S. stepped up pressure for faster appreciation while President Hu Jintao is in the country on a state visit. The yuan rose 0.1 percent last week to 6.5833 per dollar, according to China Foreign Exchange Trade System data. Non-deliverable forwards show traders are betting on a 2 percent increase in the coming 12 months.

Demand for yuan-denominated assets on expectations of currency appreciation helped Hong Kong sales of yuan bonds increase 10-fold since 2008 to 35.7 billion yuan last year, Bloomberg data show. Sales in the so-called dim sum bond market, total 4.5 billion yuan this year, the data show.

Companies may sell around 1 trillion yuan in China’s bond market this year, according to Guo Qinmiao, a Beijing-based analyst at Citic Securities Co., China’s largest brokerage by market value, in an e-mail interview.

Investment companies linked to local governments set up to fund infrastructure projects will drive bond sales this year, said Tan Weisi, who oversees about 400 million yuan as head of Fortune SGAM Fund Management Co.’s fixed-income arm in Shanghai.

Chongqing City Construction Investment Corp. sold 2.5 billion yuan of 10-year bonds on Jan. 10, according to data compiled by Bloomberg. Guiyang City Construction Investment Group Co. issued 2 billion yuan of bonds due January 2018 the following day, the data show.

“They have no options,” Tan said. “They can’t get loans easily from the bank. If the project is already underway the only option is to issue bonds. They can’t issue equity.”

source:www.bloomberg.com

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