China’s corporate bonds are set to gain after the central bank eased monetary policy following the worst four-day stock rout since 1996, brokerages and analysts said.
In the onshore market, the seven-day repurchase rate, a gauge of interbank funding costs, declined 25 basis points to 2.3 percent, the biggest drop since July 6, according to a weighted average from the National Interbank Funding Center. The People’s Bank of China said Tuesday it will cut the one-year lending rate by 25 basis points to 4.6 percent and lowered the required reserve ratio by 50 basis points for all banks.
The move provides relief as President Xi Jinping tries to balance steps to trim the world’s biggest corporate debt load while getting more money into an economy expanding at its weakest clip since 1990. Borrowing costs onshore are set to decline as the effect of cheaper bank loans spreads, while a shift to more onshore financing stands to cut yields on Chinese firms’ international notes as well by reducing supply.
“The interest rate cuts and reserve ratio cuts will certainly help cut Chinese companies’ borrowing costs,” said Zhang Li, a bond analyst in Beijing at Guotai Junan Securities Co., the nation’s second-biggest listed brokerage. “That’s good for the whole corporate bond market.”
The reserve-ratio cut will release 750 billion yuan ($116.8 billion) into the financial system, according to an estimate by Barclays Plc.
The yield on Inner Mongolia Nailun Group Inc.’s 2018 yuan bond dropped five basis points to 17.82 percent, according to exchange data. The yield on Evergrande Real Estate Group Ltd.’s 2020 dollar note declined four basis points to 13.17 percent in the offshore market as of 10:24 a.m. in Hong Kong, according to data compiled by Bloomberg.
“The rate cuts should be positive for offshore dollar bonds with lower yields onshore combined with a weaker yuan providing an incentive for Chinese investors to seek offshore investments,” said Charles Macgregor, head of Asia high-yield research in Singapore at Lucror Analytics Pte in Singapore. “China’s offshore property bonds will be a winner as developers are turning to onshore bond market given cheaper domestic funding costs. Consequently, this will reduce their liquidity risk -- hence falling inherent credit risk.”
— With assistance by Judy Chen, Lianting Tu, and Christopher Langner