China Bonds Drop Most Since 2013 as IPOs to Resume; Stocks Climb

Updated on
  • Equities bull run, share sales to attract funds from bonds
  • Expected U.S. rate increase limits room for easing in China

China’s bonds fell by the most in almost two years as plans to resume initial public offerings fueled concern that investors will switch out of debt and into equities.

The yield on sovereign notes due October 2025 climbed 11.5 basis points to 3.25 percent in Shanghai, according to National Interbank Funding Center prices. That’s the biggest jump for a benchmark 10-year note since December 2013, ChinaBond data show. Gains in financial shares led the Shanghai Composite Index to its best finish since August.

The securities regulator said on Friday that a five-month freeze in new share sales will end this year, bringing to a close a suspension that was put in place to help alleviate a stocks rout. A bond rally reversed this month as the Shanghai Composite entered a bull market and prospects grew for a December increase in U.S. interest rates, a move that could spur capital outflows. The yield advantage of China’s 10-year bonds over similar-maturity U.S. Treasuries was the smallest since 2013 at the end of last week.

“The IPO resumption and the looming Fed rate increase will drive bond yields higher in the short term,” Wang Ming, chief operations officer at Shanghai Yaozhi Asset Management LLP, which oversees 4 billion yuan ($629 million) of fixed-income securities, said on Sunday. “The IPOs will boost demand for equities, affecting asset allocation.”

A Bloomberg index of China’s local-currency sovereign debt gained 3.7 percent over the last four months as the Shanghai stock index sank 21 percent. The share gauge rose 1.6 percent on Monday, extending November’s advance to 8 percent. The Shanghai Stock Exchange Financials Sector Index rose 1.8 percent on Monday to the highest since July.

The resumption of new share sales can be seen as another sign that China is committed to continuing its financial market reforms and to becoming more integrated into global markets, according to Wayne Lin, a New York-based money manager at QS Investors LLC. Unlike in most major stock markets, Chinese regulators control the timing and pricing of new listings.

"Restarting the IPO market should have a big impact on China’s bond market because investors didn’t expect the IPO market to reopen so soon,” said Ji Weijie, a credit analyst at China Securities Co. in Beijing. “Risk appetite will likely go up and funds are likely to be reallocated to equity. In the long run, the impact depends on the performance of the stock market.”

New Rule

New share sales were a drain on local money supply prior to the halt five months ago. A 30 billion yuan offering by Guotai Junan Securities Co., China’s second-largest brokerage by market value, took the amount of locked-up funds to about 5.5 trillion yuan on June 19, an SWS Research note said at that time.

When initial share sales resume, investors will no longer be required to deposit funds for subscriptions, the nation’s securities watchdog said last week. The new rule should help prevent the offerings causing disruption to money markets, according to Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong. A total of 28 IPOs will raise a combined 11.6 billion yuan in three batches by the end of this year, according to China International Capital Corp. analyst Hanfeng Wang.

The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repurchase rate, increased four basis points to 2.42 percent on Monday, the highest in almost three weeks. The seven-day repo rate, a gauge of interbank funding availability, was little changed at 2.29 percent, a weighted average from the National Interbank Funding Center shows.

Narrowing Advantage

China’s 10-year bonds yielded 80 basis points more than similar-maturity Treasuries on Nov. 6, compared with 92 basis points at the start of the month, according to data compiled by Bloomberg. The odds of a U.S. interest-rate increase in December have climbed to 68 percent in the futures market, from 50 percent on Oct. 30.

“One thing is certain now: the U.S. interest-rate increase will limit the room for further loosening in China,” said Deng Haiqing, chief economist at JZ Securities Co. “The easing cycle is near an end.”

The People’s Bank of China has lowered benchmark interest rates six times in the past year and eased lenders’ reserve requirements to tackle a slowdown in the world’s second-largest economy. A narrowing yield advantage over the U.S. risks spurring capital outflows and driving borrowing costs higher.

President Xi Jinping said last week that average annual economic expansion should be no less than 6.5 percent in the next five years to achieve the nation’s goal of doubling 2010 gross domestic product and per capita income by 2020. Data released over the weekend showed exports fell for a fourth straight month and imports matched a record stretch of declines, signaling the economy continues to be under pressure to meet the government’s growth target of 7 percent for this year.

“The pressure to maintain GDP growth at a relatively fast pace means although yields will rise in the short run, the increase that is tolerable by the authorities is capped,” said Shanghai Yaozhi’s Wang.

— With assistance by Judy Chen, Helen Sun, and Fion Li

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