Junk Sales Halt as Morgan Stanley Recommends Hedge: China Credit
The risk of a hard landing in China’s economy has caused the longest drought in dollar-denominated junk bond sales in a year and encouraged Morgan Stanley to recommend buying credit-default protection.
Amid the nation’s worst cash crunch on record, no Chinese speculative-grade companies have marketed dollar notes since Central China Real Estate Ltd. (832) raised $400 million selling five-year securities on May 22, according to data compiled by Bloomberg. That’s the longest stretch since the market went quiet for 95 days through July 24 last year amid economic concerns, according to data compiled by Bloomberg.
Morgan Stanley on July 8 recommended buying options allowing the sale of yuan against the dollar and contracts that protect Chinese sovereign debt against non-payment. A government report yesterday showed imports and exports unexpectedly fell in June, underscoring the severity of the slowdown in the world’s second-biggest economy as Premier Li Keqiang reins in credit growth.
“The export data is another sign of a slowdown in domestic demand,” Nishant Sood, a Hong Kong-based credit strategist at Morgan Stanley said in a phone interview yesterday. Slowing orders and falling producer prices “increase the risk of a bear-case outcome in China and makes the case for a less optimistic view on Chinese credits.”
Five-year credit-default swaps insuring China’s sovereign debt against non-payment rose four basis points to 126 yesterday, and touched a 17-month high of 147 on June 24, according to CMA prices. The contracts pay the buyer face value in exchange for underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.
The yuan fell 0.08 percent to 6.1341 per dollar in Shanghai yesterday. The currency’s appreciation has stalled in the past month, limiting this year’s advance to 1.6 percent.
Chinese high-yield dollar bonds lost 4.7 percent in June, the worst rout since November 2011, while U.S. debt dropped 2.6 percent, according to indexes compiled by Bank of America Corp. Similar notes from Russia and Brazil fell 3.4 percent and 7.1 percent respectively.
Companies including Maoye International Holdings Ltd. (848) and China Properties Group Ltd. (1838) had planned to meet investors in the past two months. They have yet to sell debt. Average yields on Asia’s junk-rated securities reached 8.14 percent on July 8, the highest in more than a year, on the prospects of tapering of stimulus by the Federal Reserve.
“It’s a bad time for them to sell bonds,” said George Hsu, a Taipei-based bond fund manager at PineBridge Investments LLC, which oversees $71.5 billion of assets worldwide. The lack of near-term refinancing needs, especially for property developers, should mitigate the negative impact for the companies, Hsu said.
Issuance of speculative-grade notes froze for 95 days last year before China Fishery Group Ltd. (CFG) sold $300 million of debt on July 24, according to data compiled by Bloomberg.
Overseas shipments from China fell 3.1 percent from a year earlier in June, the most since the global financial crisis, data showed yesterday, compared with the median estimate of a 3.7 percent gain in a Bloomberg News survey. Imports dropped 0.7 percent, while the median projection was for a 6 percent increase.
The slide in June comes after a crackdown on fake invoices that inflated data in the first four months of the year. Premier Li’s reluctance to add stimulus, as he tries to reduce the role of the state in the economy, is being tested with growth in danger of trailing the official 7.5 percent target for this year.
Growth in China has held below 8 percent for the past four quarters, the first time that has happened in at least 20 years. In the latest sign the government may tolerate further deceleration, President Xi Jinping said officials shouldn’t be judged solely on their record in boosting gross domestic product, the official Xinhua News Agency reported on June 29.
“China’s undergoing a financial-model adjustment and the economy’s going to hurt for six to 12 months,” said PineBridge Investments’ Hsu. “The government’s really adopting an invisible-hand attitude towards the whole situation now.”
China’s benchmark seven-day repurchase rate reached 12.4 percent on June 20, the highest level since May 2006. It averaged 6.92 percent in June versus 3.30 percent the first five months of the year. The credit crunch is likely to reduce credit growth this year by 750 billion yuan ($122 billion), or an amount equivalent to Vietnam’s annual economic output, based on the median estimate in a Bloomberg survey.
China’s 10-year government bonds yield climbed six basis points yesterday to 3.58 percent, after gaining seven basis points in June. Similar-maturity AAA corporate debt yields increased two basis points to 5.12 percent yesterday and eight basis points in June.
The market’s upheaval in June may be seasonal and was tied to a spike in Treasury yields caused by the Fed’s signals, according to Steve Wang, head of fixed-income research at BOCI Securities Ltd., a unit of Bank of China Ltd.
“Valuation has become relatively more attractive now with little supply to worry about,” Hong Kong-based Wang said in a phone interview yesterday. “Home prices are higher and property sales are still strong, for example. I’d be more optimistic when the market stabilizes after summer.”
Investors pulled money from emerging-market debt funds for a sixth-straight week in the period ending July 3, with China bond funds seeing another week of outflows, according to EPFR Global.
“China’s economic slowdown has taken shape,” Brian Lee, a Taipei-based money manager at Schroder Investment Management Ltd. said by phone yesterday. His firm manages about $304 billion globally. “Investors are getting the impression that the gist of ’Li-conomics’ really is the idea of no pain, no gain.”
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