Bonds Nov 16

Chinese yuan treasury bonds see growing appetite

Foreign investors snap up 120 bn yuan ($18 bn) in October via the interbank market; but the country has seen a series of defaults by state enterprises recently that has shaken local investors; this led to a big injection of cash by the PBoC into the banking system

Chinese yuan treasury bonds see growing appetite
A woman walks past the headquarters of the People's Bank of China (PBoC), the central bank, in Beijing on September 28, 2020. Photo: Jason Lee/ Reuters.

(ATF) According to the latest data disclosed by China Bond Connect, as of the end of October, the accumulated holdings of China's interbank market bonds by foreign institutions reached 3 trillion yuan (US$455.77 billion), a record high.

In just one month – October – the net purchase of foreign investors in the interbank bond market reached 120.2 billion yuan ($18.23 billion). Bond Connect says the scale of yuan bonds held by foreign institutions has grown at an average annual rate of 40% since it was launched just over three years ago, in July 2017.

But while treasury bonds have been having a smooth ride, things have been rocky in other facets of China's bond sector.

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A series of major defaults recently on bonds issued by state-owned enterprises (SOEs), including even some with AAA ratings, has led to emergency measures by the central bank.

On Monday (Nov 16), the People's Bank of China injected billions of yuan into the country's banking system to soothe rattled nerves after a series of debt shocks involving SOEs led to a bond selloff last week.

The People's Bank of China (PBOC) issued 800 billion yuan ($121.5 billion) of medium-term lending facility (MLF) loans, Reuters reported. That is the largest such monthly injection since 2016, as short-term interbank borrowing costs remained elevated, reflecting concerns among traders and investors that more debt surprises may yet lurk among state-backed firms.

"Despite the huge net cash injection, liquidity was still a bit tight. But some investors hope that the default last week was purely an act by the local government, and that won't lead to wider credit risk," a trader at a Chinese bank was quoted as saying.

Coal power group default

Chinese banks and fund managers dumped their holdings of corporate bonds last week following a series of defaults. The "last straw" was a default by state-owned Yongcheng Coal & Electricity Holding Group Co, just weeks after the company raised money through a debt issue.

The company had boasted a top-shelf AAA rating from local agency China Chengxin International Credit Rating Co Ltd before its default, when it was cut to BB. China Chengxin did not immediately respond to a request for comment from Reuters on its rating methodologies.

Yongcheng said on Friday it had made interest payments on its maturing debt and was working to raise funds to repay principal.

But the company's woes come amid a series of defaults and downgrades of SOEs that have shaken investors' assumptions about what constitutes a safe investment.

Huachen Automotive Group, the state-backed parent of BMW's Chinese joint venture partner also defaulted, as ATF foretold three months ago.

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Meanwhile, state-backed integrated-circuit-maker Tsinghua Unigroup Ltd also saw its bonds tumble after a warning from a rating agency.

Fitch Ratings said on Monday it expected the number of state-owned entity defaults to rise marginally in 2021.

SOE defaults

SOE defaults are not new, but Goldman Sachs analysts Kenneth Ho and Chakki Ting said many new defaults have been from large borrowers, "helping to reduce the notion that some companies may be 'too big to fail'". 

The recent preponderance of SOE defaults suggests the government is less likely to implicitly support state firms, they added.

The result has been a rough ride for a market used to expecting government bailouts.

"Although most investors agreed that the implicit guarantee model is not sustainable in the longer run, it is still a painful transition when time comes," said Tommy Xie, head of Greater China research at OCBC Bank in Singapore. "(The) market is likely to watch various provincial governments' attitude towards their commitment to repay the debt." 

Bond indexes

China Business News reported that at present, there are three major bond index suppliers in the world: Bloomberg, JPMorgan Chase and FTSE Russell.

On January 31, 2019, Bloomberg announced that yuan-denominated Chinese government bonds and policy bank bonds would be included in the Bloomberg Barclays Global Aggregate Index (BBGA) from April 2019. Then JP Morgan Chase announced in September 2019 that starting from February 28, 2020, nine Chinese government bonds would be included in the JP Morgan Chase Global Emerging Market Government Bond Index (GBI-EM). After the inclusion, the proportion of Chinese government bonds reached 10% of the domestic market.

Then recently, on September 25, 2020, FTSE Russell announced the inclusion of Chinese bonds in the FTSE Russell World Government Bond Index (WGBI) from October 2021; a further confirmation will be made in March 2021.

In addition, Bloomberg, a major global bond index supplier, announced on November 5 that China’s government bonds and policy bank bonds had been fully included in the Bloomberg Barclays Global Composite Index in early November. At present, the weight of Chinese bonds in the index is about 6%, and the yuan is the fourth largest currency in the index after the US dollar, the euro and the Japanese yen.

There is also the ATF 50 Chinese bond index, which was launched earlier this year.

After the outbreak of the global coronavirus epidemic late last year and early this year, China's effective control of the epidemic led to it being one of the first major economies to recover. There has been a continuous increase in foreign trade exports and a steady appreciation of the yuan, which has helped promote foreign institutional investors' interest in Chinese yuan bonds.

With reporting by Reuters

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China bonds Treasury bonds foreign investors SOE bond defaults PBOC cash injection state enterprises Yongcheng Coal+Electricity Brilliance Group October data