China's Rate Cut Threatens Dry Season for Dollar Bonds in Asia

China’s Ball of Money Rolls Into Bonds
  • PineBridge says yuan SDR inclusion could intensify trend
  • Lack of dollar bond supply seen adding to sharp price swings

China’s rate reductions may draw more borrowers back to the onshore bond market and crimp already dwindling issuance of international debt from the world’s second-biggest economy.

So say PineBridge Investments Asia Ltd. and ING Bank NV, after China’s central bank lowered its one-year lending rate 25 basis points to 4.35 percent in its sixth interest-rate reduction in a year. Issuance of yuan-denominated corporate notes in China has surged 81 percent to 9.7 trillion yuan ($1.5 trillion) this year, while sales of dollar securities from the nation’s firms have dropped 12 percent to $138 billion.

That’s dragged down total supply in Asia of U.S. currency debentures, as Chinese developers and other issuers opt for local financing. The scarcity has added to price swings in existing dollar bonds from the region, as the extra yield investors demand to hold such notes over Treasuries leapt to a two-year high of 316 basis points earlier this month before sliding to 292 basis points, according to JPMorgan Chase & Co. indexes.

“There’s not enough liquidity in the secondary dollar bond market and offer-side liquidity will get worse when more Chinese issuers sell onshore or go to euro bonds,” said Antonio Cailao, the Singapore-based director of Asian credit trading at ING Bank’s Singapore branch.

Premier Li Keqiang is trying to bolster the possibility that the currency will be included in the International Monetary Fund’s reserves, known as SDR. IMF representatives have told China that the yuan is likely to join the fund’s basket soon, according to Chinese officials with knowledge of the matter.

If it does, even funding for the country’s “One Belt, One Road” campaign to develop ties along the old Silk Road may increasingly be in yuan, according to Arthur Lau, the co-head of emerging markets and head of Asia ex-Japan fixed income at PineBridge Investments. In the worst case, Asian dollar bond offerings may face “a dry season for the rest of this year,” Lau said.

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