- China Merchants Securities said yield premiums will stay low
- China Securities said credit risks won't drop `significantly'
China’s move to cut the amount of cash lenders must hold in reserve will help boost investor demand for the nation’s corporate bonds, brokerages said.
The required reserve ratio will drop by 0.5 percentage point effective March 1, the People’s Bank of China said after the country’s markets closed Monday. The yield premium on top-rated corporate notes due in five years over government securities has fallen 36 basis points in the past year to 67 basis points, and touched an eight-year low of 54 last month.
“The loose monetary environment will help ease credit risks,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “The credit spread in China’s bond market will stay tight.”
Cheaper financing is crucial as more Chinese firms struggle to repay debt amid the weakest economic growth in a quarter century. Baoding Tianwei Group Co., a maker of electrical transformers that last year became the first state-owned company to renege on onshore debentures, again failed to repay bonds that fell due last week. Policy makers have sought to balance vows to liberalize financial markets with steps to prevent a sharper jump in debt failures.
“There hasn’t been an explosive increase in bond defaults even though the economy is slowing, and that’s all because of the loose monetary policy,” said China Merchants Securities’ Sun. Notes issued by local government financing vehicles and property developers are worth investing in because the government is supporting the sectors to help avert worse cooling of economic expansion, Sun said.
Riskier borrowers may still face an increasingly difficult time, according to Ji Weijie, an analyst at China Securities Co. in Beijing.
While the reserve ratio cut will help pump liquidity into the financial system, it won’t reduce credit risks “significantly,” said Ji Weijie, an analyst at China Securities Co. in Beijing. “Banks are unwilling to lend to risky companies even with the lower reserve requirement for fear of mounting bad debts.”
— With assistance by Lianting Tu, and Judy Chen