China Development Bank and fellow state policy lender Agricultural Development Bank of China have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt.
The China Railway Corporation, another state entity, was forced to delay a deal recently, while well-known private companies including the electric carmaker BYD and internet company Baidu also delayed deals over the summer, according to bankers familiar with the situation.
Issuers are dealing with a string of problems stemming from the drying up of interbank market liquidity, and fierce competition for investors’ funds.
CDB, the policy bank whose credit profile is as good as Beijing itself, was forced last week to cut a proposed Rmb24bn ($3.9bn) deal by 60 per cent and pay a yield of more than 5.5 per cent.
“Chinese 10-year Treasury bond yields are at a six-year high and are up about 100 basis points versus a year ago,” said a bond banker in Beijing. “Corporate bonds are seeing yields rise by 150-200bp.”
The head of fixed income sales and trading at a European bank in Shanghai said the policy banks pre-disclose their issuance plans, so it is easy to see when they delay. “But for most corporations, they just quietly delay their issues.”
“Government and policy banks have suffered the most. Now pressure is coming to corporates,” he added. “It’s going to end pretty ugly unless [the central bank] changes its attitude to liquidity.”
For companies such as banks and insurers, onshore issuance of $26.8bn this year falls short of just the final quarter of last year, with $32.3bn of deals, according to Dealogic. August, September and October this year were particularly weak, although issuance has recovered a little in November.
For other companies issuance this year of $24.5bn is far behind last year’s $39.7bn total.
Zhang Zhi Ming, head of China research at HSBC, said a combination of the slowdown in the economy and the policy responses were exacerbating the funding shortage.
“China is much more funding dependent than in the past – total social financing is set to hit a new record of Rmb18tn-Rmb19tn this year up from the Rmb15.8tn record set last year,” he said.
China’s bond markets have exploded in recent years from next to non-existent before the global financial crisis. The total of non-financial corporate debt outstanding in China is already as large as that in the US, whose bond markets have grown up over decades.
But a big problem for Chinese issuers now is the tougher competition from alternative fixed income investments, such as wealth management and trust products, which offer yields of 8 or 9 per cent and are guaranteed by the issuing banks.
Banks are also doing more interbank business because the current tight supply of liquidity means it creates much higher returns than bonds.
Chinese issuers are papering over the difficulties with more offshore issuance, raising a record $51.6bn outside China so far this year, according to Dealogic, a record figure.
中国两家政策银行——国家开发银行(China Development Bank)和中国农业发展银行(Agricultural Development Bank of China)——不得不推迟或者大幅减少中国债券发行，原因是在岸信贷市场收紧的影响开始显现。
熟悉情况的银行家表示，另一家国有实体——中国铁路总公司(China Railway Corporation)最近被迫推迟一笔交易，而一些知名私企——包括电动车制造商比亚迪(BYD)和互联网公司百度(Baidu)——也在夏天期间推迟了各自的交易。