Superbank Troubleshooter Role Cuts Risk to ’08 Low
The bond risk of China Development Bank Corp. slid to the lowest in more than four years on signs the lender will maintain government backing as it takes on some of the nation’s toughest challenges in 2013.
The premium to insure state-owned CDB’s debt from non- payment for five years over the sovereign’s shrank to 14 basis points on March 12, the narrowest since October 2008, even as the so-called superbank granted loans to debt-laden urbanization and renewable energy projects. That’s down from as high as 149 in January last year, according to data provider CMA. Wells Fargo & Co. (WFC) pays 27 basis points more than the U.S. government on similar contracts.
While CDB’s role in supporting incoming Premier Li Keqiang’s focus on urbanization and cutting pollution increases the risk of bad debt, it also reinforces its status as a bank the central government must support to achieve its policies. China Banking Regulatory Commission said last April that investors can still categorize CDB debt as “zero” risk, even though the lender said it plans to commercialize five years ago.
“CDB’s policy bank status is the key comfort to investors even though it’s given these challenging tasks,” Wilson Li, a Shenzhen-based analyst at Guotai Junan Securities Co., said by telephone yesterday. “It will fund heavily indebted urbanization projects while commercial banks are walking away.”
The nation’s policy lenders -- CDB, Export-Import Bank of China, and Agricultural Development Bank of China -- were established in 1994 with mandates to help fund infrastructure, agriculture and trade. The wholly state-owned banks don’t take deposits from individuals and finance lending by issuing debt.
Li Ruogu, chairman of Export-Import Bank of China, told Bloomberg on March 11 in Beijing that he didn’t think policy banks would be turned into commercial lenders. Moody’s Investors Service rates them all at Aa3, its fourth-highest investment ranking and the same grade it assigns to the sovereign.
Li Keqiang, whose November appointment as the Communist Party’s second-highest ranking official put him in line to replace Wen Jiabao, highlighted urbanization in his first policy statement. In an article published by the official People’s Daily that month, Li called the trend a “huge engine” for growth.
The statement highlighted plans to support an urban population that exceeded rural residents for the first time in 2011 and that will add as many as 300 million people by 2030, according to Organization for Economic Cooperation and Development estimates. Chen Yuan, CDB’s chairman, said in January that urbanization would be a focus for policy lenders this year. Chen is also a vice chairman of the Chinese People’s Political Consultative Conference, which advises the country’s legislature.
“With China’s urbanization plans, the image of China Development Bank as a quasi-sovereign institution may endure as it is seen to be providing funding to support these projects,” Frances Cheung, a senior strategist at Credit Agricole CIB in Hong Kong, said in a telephone interview March 11.
The extra yield the policy banks pay to sell 10-year bonds compared with the government fell to a six-month low at 65.3 basis points on March 12, as economic acceleration pushes up sovereign yields. Growth will rebound to 8.1 percent from 7.8 percent last year, according to the median forecast of 45 economists surveyed by Bloomberg. Gross domestic product expanded 7.9 percent in the three months through December, up from 7.4 percent in the previous period.
The cost of insuring the debt of China’s largest lender to roads, bridges and railways against non-payment with credit- default swap contracts for five years slid to 76 basis points on March 12, the least since May 2008. It has dropped 34 basis points this year to 78 as of yesterday, CMA prices show.
Contracts on China’s sovereign debt have fallen 3 basis points to 63 in the same period, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s down from as much as 145.9 in June last year, after economic growth accelerated last quarter for the first time in two years. The indexes typically fall as investor confidence improves and rise as it deteriorates.
CDB didn’t immediately respond to two e-mails and two faxes seeking comment on the decline of its bond risk.
The urbanization push and economic pickup have tempered concerns about bad loans, which had pushed the swap contracts on CDB to as much as 382 in October 2011 after rating companies said the risks of lending to local governments and private companies had been underestimated.
The bank’s non-performing loan ratio fell to 0.3 percent at the end of last year from 0.4 percent in 2011, according to its website. CDB’s total assets increased to 7.37 trillion yuan ($1.19 trillion) in 2012 from more than 6 trillion yuan in the previous year.
Cities and counties are turning to CDB for funds to sustain investment and pay off debt that surged to 10.7 trillion yuan following state-directed stimulus spending on roads, bridges and subways after the global financial crisis. A government audit in June 2011, showed that 79 percent of the debt owned by local governments was in the form of borrowing from banks.
China’s banking watchdog urged lenders to exercise caution in holding bonds issued by local government financing vehicles, the 21st Century Business Herald reported yesterday, citing a regulatory official it didn’t name. Banks aren’t allowed to increase their outstanding loans to the financing vehicles above the level as of Dec. 31, 2011, according to the report.
Yields on benchmark 10-year government notes have risen 2 basis points this year to 3.59 percent, after climbing to as high as 3.61 percent on Jan. 29.
The yuan touched a 19-year high at 6.2124 on Jan. 14. The currency was at 6.2161 per dollar as of 10:04 a.m. in Shanghai, prices from the China Foreign Exchange Trade System show.
“With the government’s aim to promote growth, China Development Bank will definitely benefit with its policy-related lending continuing to climb,” Chen Xingyu, a Shanghai-based analyst at Phillip Securities Group, said by telephone on March 11.
While CDB’s near-sovereign status helps it raise funds easily in the bond market, its debt does entail “exposure to high-risk lending,” according to Stanley Li, an analyst at Mirae Asset Securities (HK) Ltd. It has extended financing to China’s solar industry, “which is relatively risky,” Li said by telephone on March 11.
Even after solar panel prices slid 20 percent last year, prompting losses at Chinese manufacturers, CDB agreed to set up a joint venture to invest in solar projects at home and abroad, according to a China Windpower Group Ltd. (182) statement this week. LDK Solar Co., the second-biggest maker of wafers, said Jan. 31 that it received approval for a 440 million yuan loan from CDB.
The superbank has sold $1.4 billion of dollar-denominated bonds this year, including $50 million of 2016 notes on Feb. 22 at 1.12 percent. Its 2023 yuan-denominated bonds yield 4.36 percent as of yesterday, down 8 basis points from when they were sold in January, according to Chinabond prices.
Borrowing costs have dropped amid expectations that authorities will protect the policy banks to sustain financing for projects that support growth, according to Phillip Securities’s Chen.
“CDB has a political mission,” Chen said. “The Chinese government will surely provide backing for the bank and won’t let it fail.”