Yuan Bond Sales Hit Record Led by Railways as Spreads Narrow: China Credit

China’s plans to lay twice as much high-speed track as the rest of the world combined is turning 2010 into a record year for yuan bond sales.

The rail ministry will issue 20 billion yuan ($3 billion) in 10- and 15-year notes today, pushing non-sovereign sales to 312 billion yuan this year, up from 307 billion yuan in the same period of 2009 and the most since Bloomberg began compiling the data in 1999. The ministry’s new bonds due in October 2025 were priced to yield 4.1 percent, or 90 basis points less than similar-maturity debt sold in September 2009, the data show.

Government restrictions on bank loans to cool inflation in an economy growing four times faster than the U.S. are increasing the funds banks have available to buy bonds, driving down costs for financing projects. China is spending about $300 billion to build a high-speed network of at least 18,000 kilometers (11,185 miles) by 2020. By contrast, President Barack Obama’s $50 billion program to repair “crumbling” U.S. transport networks awaits Congressional approval.

“An up-and-coming China investing in greenfield projects related to its economic build-out starkly contrasts with a mature U.S. economy where infrastructure spending has been neglected,” Tim Condon, the Singapore-based head of Asia research for ING Groep NV, said in an interview yesterday. “The railway sector is a particularly stunning example of this contrast.”

Competitive Disadvantage

High-speed track will connect all of China’s provincial capitals and cities of at least 500,000 people by 2020, the Beijing-based Ministry of Railways said in 2008. “Crumbling” roads, bridges, airports and rail lines are hindering growth, while other nations are “playing to win tomorrow,” Obama said on Oct. 11, a week after New Jersey’s governor canceled work on a commuter-rail tunnel link to New York, citing cost overruns.

“The stimulus that was pushed out starting at the end of 2008 was very important for railway investments as it gave the go-ahead for a backlog of major infrastructure projects,” Jinny Yan, a Shanghai-based economist at Standard Chartered Plc, said in an Oct. 12 interview. “The question now is who is paying for these railway lines?”

The rail ministry raised 160 billion yuan from bonds this year, while China Railway Group Ltd. raised 7.7 billion yuan, China Rail Construction Corp. raised 5 billion yuan and Taiyuan Hi-Speed Railway Investment Co. got 2 billion yuan from its first note sale, according to data compiled by Bloomberg.

The yield on China Rail Construction’s 10 billion yuan in 3.4 percent bonds due in August 2012 fell this year to 3.23 percent from 3.784 percent, according to Chinabond prices on Bloomberg.

Golden Spike

Union Pacific and Central Pacific built the first transcontinental railroad in the U.S., which was completed with a golden spike in 1869. Union Pacific Corp.’s $400 million of 6.125 percent bonds due in 2020 yield 3.5 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Burlington Northern Santa Fe, the railroad bought by Berkshire Hathaway Inc. in February, has sold $1.5 billion of bonds this year. Burlington’s $200 million of 3.6 percent notes due in 2020 currently yield 3.165 percent, according to Trace.

The China ministry’s 10-year notes were priced to yield 4 percent, or 70 basis points below similar-maturity securities sold last year. A basis point is 0.01 percentage point. A press officer at the ministry said officials weren’t immediately available for comment.

Spreads Narrow

The yield on the 3.28 percent government bond due in August 2020 fell 21 basis points in the same period to 3.39 percent, Interbank Funding Center data showed. The Finance Ministry sold 28 billion yuan of seven-year notes yesterday at an average yield of 3.1 percent, in line with the average estimate in a Bloomberg survey. The sale drew bids for 1.66 times the amount on offer.

The difference in yield between China’s top-rated 10-year corporate bonds and similar-maturity government notes has fallen to 94 basis points, down from 166 basis points a year earlier, according to Bloomberg and Chinabond data.

Banks are investing their deposits in the bond market after the central bank set a goal of capping new bank loans in March at 7.5 trillion yuan this year. Lenders advanced 6.3 trillion yuan in the first nine months, while adding 10.3 trillion yuan of deposits, according to the central bank.

The International Monetary Fund forecast last week that China’s gross domestic product will climb 10.5 percent this year, outpacing expansion of 2.6 percent in the U.S.

Trade Surplus

Money is flooding into the economy as the trade surplus widens and investors bet on appreciation in the nation’s currency. Foreign-exchange reserves rose to a record $2.65 trillion on Sept. 30, the central bank reported yesterday. Exports climbed 25.1 percent last month from a year earlier, leading to a trade surplus of $16.9 billion, according to the customs bureau.

Twelve-month non-deliverable yuan forwards advanced 3.4 percent in the past month to 6.4360 per dollar in Hong Kong, reflecting bets for a gain of 3.4 percent from the onshore spot rate. The currency strengthened 0.1 percent to 6.6565 as of 11:25 a.m. in Shanghai.

China government bond risk is falling, according to credit- default swaps. Five-year contracts on the nation’s debt declined 29 percent in the past month, the biggest drop among more than 80 nations, and ended yesterday at 52 basis points, according to data compiled by CMA and Bloomberg. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

Bonds Rally

China’s $1 billion of 4.75 percent bonds due October 2013 rallied in the past month, sending the yield down 38 basis points to 1.37 percent, according to prices compiled by Bloomberg. The extra yield investors require to hold China’s debt instead of Treasuries was 80 basis points yesterday, according to JPMorgan’s EMBI Global Index.

California Governor Arnold Schwarzenegger rode on bullet trains in Asia last month as the rail ministry said China can offer a “complete package” to compete for a $40 billion high- speed project linking Los Angeles to San Francisco. The state with the worst credit rating in the U.S. approved a $10 billion bond sale in 2008 to help pay for the line, which is scheduled to start services in 2020.

“China has never been in such a rural construction boom, and the railway sector has been grossly neglected, but it has become a high priority again,” Tao Dong, the chief regional economist for Credit Suisse Group AG, said in an Oct. 12 phone interview from Hong Kong.

To contact the reporter on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net

To contact the editor responsible for this story: Will McSheehy at wmcsheehy@bloomberg.net