China Dollar Borrowing Costs Fall Most This Year on Stimulus Bet

Chinese dollar-denominated borrowing costs are set to reduce this week by the most this year after a decline in industrial output fueled bets the government will increase economic stimulus.

The average premium on Chinese notes in the U.S. currency has dropped 12 basis points since March 21 to 368.5 basis points, poised for its biggest weekly decline since the five business days ended Dec. 6, JPMorgan Chase & Co. indexes show. That’s down from a seven-month high of 389 on March 19, after Zhejiang Xingrun Real Estate Co. collapsed and Shanghai Chaori Solar Energy Science & Technology Co. defaulted.

A preliminary gauge of manufacturing released earlier this week which showed a drop in output for March prompted a “bad news equals good” view, according to Australia & New Zealand Banking Group Ltd. A decline in supply of dollar bonds by companies in China has also burnished the debt’s appeal, Mizuho Securities Asia Ltd. said. Issuance from the country has halved to $1.65 billion in March from February, Bloomberg data show.

“This week’s strong performance of Chinese dollar bonds is down to the unexpectedly light offshore supply from Chinese issuers,” said Mark Reade, a Hong Kong-based desk analyst at Mizuho. “This, coupled with a growing expectation of economic stimulus measures post Monday’s weak manufacturing data.”

The preliminary manufacturing index from HSBC Holdings Plc and Markit Economics slid to 48.1 from February’s final 48.5 figure. Numbers below 50 signal contraction.

Risk Falls

The cost of insuring corporate and sovereign bonds from default in Asia and Australia fell today.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan decreased 1 basis point to 130 basis points as of 8:29 a.m. in Hong Kong, ANZ prices show. The gauge is set to fall 4.5 basis points this week, according to data provider CMA.

The Markit iTraxx Australia index dropped 0.5 of a basis point to 102.5 as of 10:59 a.m. in Sydney, according to Westpac Banking Corp. The measure is poised to end the week down just 0.2 of a basis point, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market.

The Markit iTraxx Japan index was little changed at 85.3 as of 9:01 a.m. in Tokyo, Citigroup Inc. prices show, on track for a 3.7 basis-point decline this week.

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.

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