China Rate Swap Jumps as Bond Sales Pulled Amid Default Risk

China’s interest-rate swaps jumped the most in a year and at least four companies scrapped debt sales amid concern the nation faces what would be the second default in its $4.4 trillion onshore bond market.

The cost of one-year swaps that exchange fixed payments for the floating seven-day repurchase rate rose 17 basis points, or 0.17 percentage point, to 4.10 percent in Shanghai, according to data compiled by Bloomberg. That’s the biggest increase since July 22, 2013, and adds to a 20 basis-point gain in the last three days. Junk bond yields jumped the most in three months.

“The impact is psychological since theoretically money markets don’t contain credit risks,” said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. “Banks may make some preparatory measures ahead of the default and release less funds. But this impact is short-term.”

Huatong Road & Bridge Group Co., based in the northern province of Shanxi, said it may miss a 400 million yuan ($64.5 million) short-term note payment due July 23, according to a statement to the Shanghai Clearing House yesterday. Benxi Iron & Steel Group Co., Shanghai JuneYao Group Co., Jiangsu Fasten Group Ltd. and a unit of China National Nonferrous Metals Industry Corp. scrapped bond sales totaling 3.22 billion yuan.

‘Shake Confidence’

A default, if it happens, could affect the junk yield segment the most, according to Becky Liu, a Hong Kong-based strategist at Standard Chartered Plc.

“If these bonds are really going to default in principal, it would surely shake the confidence in the domestic commercial paper and medium-term notes,” Liu said today in a phone interview. “If it’s truly a default, it’s going to change a bit of the dynamic for people to invest in commercial paper and medium-term notes because the so-called implicit guarantee by the underwriter may be deemed impossible.”

Benxi Iron & Steel Group canceled a medium-term note issuance, it said in a statement to Shanghai Clearing House today, citing increased market volatility. The company initially planned to sell 2 billion yuan of five-year bonds. Jiangsu Fasten Group Ltd. canceled a 400 million yuan sale of short-term notes, while Shanghai JuneYao Group and a unit of China National Nonferrous Metals Industry postponed a combined 820 million yuan of debt sales today, citing changes in the market.

China’s economy is forecast to grow at the slowest pace since 1990 as the government cracks down on corruption and rising debt levels. Shanghai Chaori Solar Energy Science & Technology Co. marked the country’s first onshore corporate bond default in March when it missed a coupon payment. Huatong Road would be the first to fail to pay both interest and principal, and would also be the first in the interbank note market, the nation’s biggest bond bourse.

Higher Rates

The seven-day repo rate, a gauge of interbank funding availability, was little changed today at 3.71 percent, according to a weighted average compiled by the National Interbank Funding Center. The central bank sold 18 billion yuan of 28-day repurchase agreements at 4 percent, it said in a statement.

The yield on the government’s 4 percent bonds due June 2024 jumped 10 basis points to 4.45 percent, according to data from the National Interbank Funding Center. That’s the highest level since April and the biggest increase of 2014 for a benchmark 10-year sovereign note.

The rate on five-year corporate debt rated AA- rose three basis points today to 6.9099 percent, a Chinabond index shows. Ratings of AA- or below are equivalent to non-investment grades globally, according to Haitong Securities Co., the nation’s second-biggest brokerage.

To contact the reporters on this story: Justina Lee in Taipei at jlee1489@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Andrew Janes, Stephen Kirkland

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