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China’s Bond Risk Poised For First Rise in 5 Weeks Amid Slowdown

The perception of China’s creditworthiness weakened for the first time in five weeks as a slump in manufacturing added to signs of an economic slowdown, driving up yields in Asia’s bond markets.

The cost of insuring China’s sovereign notes against non-payment was at 110 basis points as of 9:12 a.m. in Singapore, according to prices from Westpac Banking Corp. (WBC) That’s up 12 basis points since July 19, set for the first weekly gain since June 21, according to data provider CMA. Average dollar bond yields for Asian borrowers climbed seven to 5.21 percent for the first advance in three weeks, according to JPMorgan Chase & Co. indexes.

China has ordered more than 1,400 companies in 19 industries to cut excess production capacity this year as part of efforts to shift toward slower and more sustainable growth. Steel, copper smelting, cement and paper are among areas affected, the government said in a statement yesterday. Manufacturing fell in July to the lowest in 11 months, according to the preliminary reading published by HSBC Holdings Plc and Markit Economics on July 24.

“There’s been a marginal increase in credit risk in the region,” said Hemant Dharnidharka, head of credit research at SJS Markets Ltd. “If the Chinese numbers deteriorate further, the overall global economic scenario would worsen.”

Asia Risk

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan was unchanged at 142 basis points as of 8:30 a.m. in Singapore, Westpac prices show. The benchmark is headed for its biggest weekly gain in five weeks, rising from 132.8 on July 19, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The Markit iTraxx Australia index rose 120 basis points as of 10:28 a.m. in Sydney, according to National Australia Bank Ltd. prices. The measure is on track for its first weekly gain since the five days ended June 21, according to CMA, which compiles prices quoted by dealers in the private market.

The Markit iTraxx Japan index fell 0.5 basis points to 98.5 basis points as of 9:28 a.m. in Tokyo, according to Citigroup Inc. prices. The gauge is set to fall for the first time in three days, according to CMA.

Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Jun Yang in Hong Kong at jyang180@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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