Yields Slide as Ping An Targets Corporate Bonds: China Credit
Yields on China’s corporate bonds are falling at a record pace relative to government debt as regulators allow insurance companies to boost their holdings of the securities.
The premium investors demand to hold 10-year notes issued by companies rated AAA instead of sovereign debt shrank 49 basis points this year to 89 basis points, the biggest annual drop in Chinabond data going back to 2006. Ping An Insurance (Group) Co., China’s No. 2 insurer, will raise the proportion of corporate issues in its holdings, Deputy Chief Investment Officer Timothy Chan said in an Oct. 21 interview in Shanghai.
China has the lowest yields of the world’s four largest developing economies and its financial companies are favoring notes that offer the potential for higher returns amid the fastest inflation in almost two years. The local-currency corporate bond market expanded 54 percent to $546 billion in the year to June 30, helping fund private enterprises in a nation that’s relied on state-bank lending for three decades, the Asian Development Bank said in a report this month.
“So long as we can get hold of the paper, we prefer corporate bonds,” said Chan, who oversees about 600 billion yuan ($90 billion) as chairman of Ping An’s asset-management unit. “The biggest concern is negative interest rates. Either rates have to go up or inflation has to come down.”
The yield on Ping An’s investment income was 3.7 percent in the first half of this year, down from 4.8 percent in the same period of 2009, the company said Aug. 25. Ping An had 86 percent of its portfolio invested in fixed-income assets and 9 percent in equities at the end of June, according to Chan.
China’s consumer prices climbed 3.6 percent in September, the most in 23 months, the statistics bureau said on Oct. 21. Gross domestic product increased 9.6 percent in the last three months from the same period of 2009, the smallest gain in a year. Two days earlier, the People’s Bank of China raised its one-year lending rate by a quarter of a percentage point to 5.56 percent and its deposit rate by the same amount to 2.5 percent.
Inflation “isn’t going away” and the central bank should “theoretically” raise rates further, Chan said. Policy makers will likely boost borrowing costs at least twice in 2011, according to eight of 12 economists surveyed by Bloomberg News on Oct. 21.
One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, rose 19 basis points last week to a four-month high of 2.38 percent. While the swap rate is still lower than the deposit rate, the gain suggests investors are adding to bets for another increase in borrowing costs this year. Five-year swaps climbed 34 basis points to 3.42 percent, according to data compiled by Bloomberg.
The China Insurance Regulatory Commission raised the ceiling on Aug. 5 for an insurance firm’s non-guaranteed corporate bond holdings to 20 percent of total assets in the previous quarter, from 15 percent. The principal and interest of guaranteed notes are backed by a third party.
The difference in yields between guaranteed corporate bonds and government securities may range from 80 basis points to 100 basis points in 2011, and the spread for non-guaranteed debt may be 10 to 20 basis points wider, Ping An’s Chan said.
Demand for corporate bonds has also grown this year as lending curbs prompt commercial banks to funnel more capital into debt. The central bank raised reserve-requirement ratios for the four largest lenders four times this year and restricted property lending to help prevent a bubble.
“Most financial institutions have increased investments in corporate debt this year,” said Tang Guohui, a bond trader at Industrial Securities Co. in Shanghai. “We also boosted our investments by 20 percent.”
Rising demand for the securities has helped drive down yields, mitigating the impact on companies’ borrowing costs of the first rate increase since 2007. The rate on 10-year debt issued by companies with top AAA ratings has dropped 49 basis points this year to 4.53 percent. It’s up from as low as 4.14 percent on Aug. 20.
Similar-maturity government bonds yield 3.64 percent, compared with 12.18 percent in Brazil, 8.14 percent in India and 7.96 percent in Russia. Chinese government yields surged 20 basis points on Oct. 20, when the rate increase took effect, and climbed another 2 basis points in the past two days.
The yuan weakened 0.3 percent last week to 6.6590 per dollar in Shanghai, trimming its gain this month to 0.5 percent. The government allowed the currency to strengthen 1.7 percent in September, the biggest monthly gain since a peg ended in July 2005. Non-deliverable forwards show traders expect 2.8 percent appreciation to 6.4753 during the next 12 months.
China’s central bank said on Aug. 17 it would let overseas financial institutions invest yuan holdings in the nation’s interbank bond market to promote greater use of the currency in global trade and finance. Standard Chartered Plc and HSBC Holdings Plc said this month they have received approval.
Chinese government dollar bond risk is falling, reflecting optimism over the economy’s outlook, according to traders of credit-default swaps. Five-year contracts on the nation’s debt dropped 10 basis points this month to 57 basis points on Oct. 22, according to CMA prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Insurers will face increasing risks as their investments expand, Wu Dingfu, Chairman of the China Insurance Regulatory Commission, wrote in an article published in China Finance magazine this month. Chan said Ping An started creating a credit-analyst team in 2003 to prepare for more investments in corporate securities.
“We have built our own credit-rating system ourselves,” said Chan. “That will help us avoid a lot of credit risks,” he said, adding that Ping An doesn’t hold property debt.
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