China Structured Note Sales Climb Amid Emerging Market Selloff

Global sales of structured notes tied to the debt of China and its biggest banks are increasing as the country’s slowing growth and widening credit risk make bets on its assets more rewarding.

Issuance of securities linked to the bonds of the Chinese government or state-owned lenders jumped to $148 million this year compared with $20 million in the same period of 2013, according to data compiled by Bloomberg. A total $269.9 million of the notes were sold in all of last year.

The cost to insure China’s debt against losses with credit-default swaps rose to 104.8 basis points in January from 80 basis points on Dec. 31, as data signaled a slower pace of expansion. With the Federal Reserve withdrawing stimulus measures, concerns global growth will slow roiled emerging market economies.

When emerging markets flounder “you’d better be invested in China,” said Regis Chatellier, director and emerging market credit strategist at Societe Generale SA (GLE) in London. China’s fundamentals and balance sheet are “relatively solid”, he said, so investors can pick up higher yields without too much added risk.

China’s gross domestic product advanced 7.7 percent in 2013, according to the government’s preliminary figures, the smallest increase since 1999.

Standard Chartered Plc (STAN) sold $50 million of six-month notes tied to Bank of China Ltd. on Feb. 14, the biggest offering linked to the Beijing-based lender since November 2010. The securities yield 0.8 percent at maturity.

Bank of China

Issuance of notes tied to the fourth-largest Chinese bank’s debt has reached $101.2 million this year, compared with $154 million for all of 2013.

Shaun Gamble, a London-based spokesman for Standard Chartered, didn’t return calls seeking comment.

Investors look differently at China than at other emerging markets because of its diversified economy and policy to keep the currency’s exchange rate stable, said Nordine Farsi, head of structured credit trading at Landesbank Baden-Wuerttemberg in London.

“Argentina, Turkey, Russia, Brazil, they all defaulted in the past and can still default today,” he said.

Editors: Michael Shanahan, Shelley Smith

To contact Bloomberg News staff for this story: Luca Casiraghi in London at lcasiraghi@bloomberg.net

To contact the editors responsible for this story: Luca Casiraghi at lcasiraghi@bloomberg.net; Shelley Smith at ssmith118@bloomberg.net

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