China’s Premier Li Keqiang has promised to cut credit while also meeting a 7.5 percent economic growth target. Record bond sales last quarter show which pledge he’s prioritizing.
Issuance jumped 54 percent from the previous three months to 1.55 trillion yuan ($250 billion), the most in data compiled by Bloomberg. Yields on two-year AAA rated corporate notes have dropped 137 basis points this year to near a 10-month low of 4.86 percent, as authorities eased after tightening that had sparked credit crunches in 2013.
When Premier Li took office last year he stressed the need for painful reforms to pare the influence of the state, wean industries with overcapacity from debt and ease access to funds for smaller enterprises. The latest filings of more than 4,000 publicly traded non-financial Chinese companies show $2.05 trillion of obligations, up from $1.8 trillion at the end of 2012, with the 10 biggest state-owned borrowers accounting for 18 percent of the liabilities.
“The government may have sped up the approval of corporate bonds to help stabilize the economy,” said Xu Hanfei, a bond analyst in Shanghai at Guotai Junan Securities Co., the nation’s third-biggest brokerage. “The issuance may continue to increase in the third quarter because that’s when rising bond sales help the government’s stimulus measures work.”
Bond offerings since Dec. 31 rallied to a record 2.57 trillion yuan, after falling to a more than one-year low of 1.72 trillion in the second half of 2013. Chinese companies increased debt to $14.2 trillion as of Dec. 31, surpassing the $13.1 trillion in the U.S., according to a June 15 Standard & Poor’s report.
The Finance Ministry called for faster spending of budgeted funds in May, and the State Council said it would increase support to service industries amid “relatively large” downward economic pressure. That followed steps outlined in April for faster railway spending and tax breaks to help ensure the government meets its economic expansion goal.
China’s manufacturing expanded in June at the fastest pace this year, the Purchasing Managers’ Index showed yesterday. While such signals support Premier Li’s contention the nation will meet its 7.5 percent growth target this year, the government’s efforts to prod expansion have added to concern borrowings may continue to rise.
China should refrain from rolling out more stimulus and continue to implement changes to curb dangers from so-called shadow banking and local government debt, David Lipton, the first deputy managing director of the International Monetary Fund, said June 5.
While China’s National Audit Office said last week growth in regional debt has slowed, the absolute level is still high as a proportion of the economy, according to Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. Local borrowings surged 67 percent to 17.9 trillion yuan as of June 2013 from the end of 2010.
Pressure to refinance old debt is forcing China’s local-government financing vehicles to issue a record amount of bonds this year. They sold 879.9 billion yuan of notes since Dec. 31, the most in the same period since at least 1999, according to data compiled by Bloomberg on so-called chengtou bonds issued by the fundraising units.
“The increasing bond issuance will add to the future debt load of local government financing vehicles,” said Liu Dongliang, a senior analyst in Shanghai at China Merchants Bank Co.
Authorities have sought to rein in shadow banking that ballooned to 38.8 trillion yuan as of the end of last year, according to a May Barclays Plc report. Aggregate financing, China’s broadest measure of new credit that includes such fundraising, fell to 1.4 trillion yuan in May, from 1.19 trillion yuan the same month last year.
“Chinese companies have reverted to bank loans or the bond market for funding after the government strengthened controls on shadow banking,” China Merchants’ Liu said.
Authorities have allowed borrowing costs to fall in 2014 after engineering credit crunches last year that sparked concern defaults would spread. The yield premium on top-rated corporate notes due in two years over similar-maturity government securities dropped 66 basis points this year to 123 basis points.
The yield on the benchmark 10-year sovereign note has declined 47 basis points to 4.08 percent this year as the cooling economy added to demand for haven assets. The yuan has fallen 2.4 percent against the dollar since Dec. 31, making it Asia’s worst-performing major currency.
“When the economy slows, stabilizing the economy is certainly a more important task than deleveraging,” said Sun Binbin, a bond analyst in Shanghai at China Merchants Securities Co. “Yields are declining and liquidity is loose, so it’s more convenient for companies to raise money, especially in the bond market.”