Slowing deflation data buoys corporate bonds

New year rally on credits benchmark extends to 11 days after factory gates PMI shows slowing price decline 

Slowing deflation data buoys corporate bonds

(ATF) China bonds surged Monday after official data showing a slowing in the decline of producer prices indicated that corporate balance sheets are strengthening.

Bonds of infrastructure companies including Hefei Construction surged after GCL System Integrated (GCLSI) said it would invest $122 million in the province to kickstart construction of a massive solar panel factory.

Industrial companies gained on growing optimism that the presidency of Joe Biden will lead to the softening of sanctions against Chinese firms with suspected links to the military and on expectations of further infrastructure development.

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The ATF China Bond 50 Index climbed 0.09%, extending its new year rally to 11 days and 0.48%. Of the sub-indexes, Corporates advanced 0.10%, Enterprises rose 0.09%, Financials added 0.06% and Local Governments gained 0.03%. 

Chinese bonds have rallied since the fourth quarter of 2020 as the economy’s growth from the pandemic downturn has accelerated and foreign interest in China’s fixed-income assets has grown. Additionally, the People’s Bank of China has been reluctant to add more stimulus for fear of overheating the recovery, helping to keep Chinese interest rates higher and more attractive to overseas investors.

Slowest pace

Data showing China's factory gate prices fell last month at their slowest pace since February buoyed industrial and financial bonds. The yield on the 4.28% bond of Nanjing State-Owned Asset fell 0.81% and that on the 4.98% security of Sinochem dropped 0.11%.

The producer price index fell 0.4% from a year earlier, the National Bureau of Statistics said in a statement. The index was expected to fall 0.8%, according to a median forecast in a Reuters poll, after a 1.5% drop in November.

The consumer price index rose 0.2% from a year earlier in December, after easing 0.5% in November, the first fall since October 2009. Analysts in the Reuters poll had forecast a 0.1% rise.

"Both the PPI and CPI also surprised this morning, [as] headline inflation increased faster sequentially than expected, said Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong.

The rate on China Aerospace Science Industry’s 4.79% debt fell 0.29%, continuing a rally on the notes of aerospace firms. Investors are betting that outgoing president Donald Trump’s investment sanctions on many Chinese firms thought to have links with the People’s Liberation Army may be relaxed under Biden.

Of financial bonds, China Merchants Securities saw the biggest jump with the yield on its 3.45% bond plummeting 7.22%. CITIC Group’s 5.18% note saw its yield fall 0.45% and that on ICBC’s 3.37% security plunged 1.07%.

Solar panel manufacturing giant GCLSI said it would begin investment in a $122m factory in Anhui province’s Hefei City. The move is seen as a boon for the securities of infrastructure companies, which are likely to benefit from the roll out of more green energy projects. 

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