China Junk Bonds More Resilient Than US Peers
World Economy

China Junk Bonds More Resilient Than US Peers

Chinese junk bonds are getting some help from the nation’s central bank, making them more resilient if not immune to the global swoon in the riskiest debt ahead of the Federal Reserve’s interest rate decision.
While the average yield on Chinese firms’ speculative-grade notes in dollars has risen 30 basis points in the past 30 days to a two-month high of 8.84%, that’s less than the 79 basis point jump in similarly rated securities in the US to 8.97%, according to Bank of America Merrill Lynch indexes, Bloomberg reported.
In China’s onshore market, the yield on five-year securities with local ratings of AA-, considered junk in the nation, has dropped 20 basis points in the period to a more than six-year low of 4.67%, according to ChinaBond data.
The relief for Chinese borrowers comes as the People’s Bank of China seeks to get more money into an economy growing at the weakest pace in a quarter century, just as the Fed considers raising interest rates for the first time in almost a decade. The PBOC has reduced interest rates six times since November 2014 by a total 1.65 percentage points to 4.35%, helping limit the impact of at least seven local note defaults this year.
“China’s risky bonds are facing more pressure and investors are worried,” said Liu Dongliang, a senior credit analyst at China Merchants Bank Co. in Shenzhen. “Yet China is in a different monetary policy cycle than the US and the government has more room to cut rates and bank reserve ratios to counterbalance any potential risks.”
Premier Li Keqiang has said he would allow more defaults while preventing systemic risks. More companies are reneging on obligations after authorities allowed the first nonpayment in the onshore market last year, when Shanghai Chaori Solar Energy Science & Technology Co. missed payment on notes.
Ordos City Huayan Investment Group Co., based in the northern region of Inner Mongolia, said last week that it was uncertain if it could repay investors who have opted to redeem 1.14 billion yuan ($176 million) of notes on Dec. 17.
Firms in China scrapped or delayed at least 12.7 billion yuan of bond sales this month as more companies flagged default risks, after some 60 billion yuan of canceled offerings in November, according to a Dec. 15 report from Hua Chuang Securities Co.
“Big scale defaults are unlikely because the excess capacity will be cleared out slowly,” China Merchants Bank’s Liu said. “Local governments have incentives to bail out firms in their regions to maintain economic growth.”

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