China’s Dollar Debt Gets Riskier Than Ever While Yuan Bonds Calm

China Credit Tracker

China’s local credit market has seldom been stronger, averting a record rout rocking global bonds, as the nation’s central bank goes its own way in easing policy while others tighten.

That contrasts with some of the worst distress ever in offshore Chinese notes -- marred by a property debt crisis, geopolitical tensions and a broader global selloff in fixed income sparked by inflation.

The divergence is raising questions about how long China can continue to insulate its yuan corporate-bond market, as cash shortages strike more developers. At the same time, the split is creating opportunities for Chinese investors who can stomach the risk, as some look for bargains offshore.

Bloomberg’s China Credit Tracker underscores the widening gap. Stress for local bonds eased to the lowest possible level of 1 in September from 2 the previous month, driven by the least onshore defaults since February as firms prioritized payments to mainland creditors. Yuan spreads also narrowed, after the People’s Bank of China eased policy to buffer against the real estate market woes.

In contrast, the stress gauge for Chinese offshore notes worsened to the maximum level of 6 from 5. Those dollar bonds lost 3.5% in September, the biggest slump since 2013, as the global rout in fixed income also took a toll.

Dive into the methodology behind Bloomberg’s China Credit Tracker

The divergence has generally continued since China returned from a national holiday the first week of this month.

Local spreads remain near recent lows as the PBOC sticks with its loose monetary policy. That’s worlds away from the situation internationally, where rate hikes by other central banks have pushed up yields.

China-specific concerns are also dragging prices on dollar junk notes from the nation’s borrowers toward all-time lows.

One trigger has been a developer emblematic of the difficulty in staunching the property crisis. CIFI Holdings Group Co., a Shanghai-based builder that priced a state-backed note last month, has found even that’s not enough to stop the distress. A trustee said CIFI defaulted on a convertible bond and the company warned it may face a similar fate on offshore debt if obligations go unmet.

That’s ominous for the onshore market too, because CIFI was among a small group of developers selected for a new scheme to get guarantees from a state-backed firm for yuan debt sales. When that program emerged in August, it sparked a broader rally that’s now faded.

Despite the pain in Chinese dollar securities, there is some interest from mainland bargain hunters grappling with low local yields.

“Onshore money is pouring into offshore high-grade dollar credits, especially the notes sold by firms with state backing, as the different policy stances have created very attractive buying opportunities,” according to Ting Meng, senior Asia credit strategist at ANZ Bank China Co. The mainland inflows are “large enough to shore up this part of the investment-grade credit market,” she said.

Tracking Trouble

Monthly bond maturities for Chinese firms that could struggle to repay

Source: Bloomberg

Investors are now watching for more policy support. The central bank and top financial regulator in late September told China’s six largest banks to offer at least 100 billion yuan ($14 billion) each in financing support to the real estate sector.

The twice-a-decade Communist Party Congress in coming days is also a focus. Any further steps to help home-sale demand would be particularly welcomed by credit traders.

Provincial Breakdown

Fujian tops all mainland provinces with the most onshore defaulted bonds

Note: Map shows mainland China's onshore bond market. Figures are in billion yuan. Source: Bloomberg

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