Li Cutting Wrist Lifts Rail Costs Most in 16 Weeks: China CreditJasmine Wang
China’s railway network became the first test case for Premier Li Keqiang’s pledge to cut the “hand” of the state in the economy, pushing its borrowing costs up the most in 16 weeks.
The yield premium over government notes for one-year bonds from the former Ministry of Railways, whose debt was transferred to the newly created China Railway Corp. on March 17, jumped 10 basis points last week to 118, the biggest rise since the period ended Nov. 23, data compiled by Bloomberg show. The yield of 3.95 percent is lower than the 8.99 percent for similar-maturity notes of Indian Railway Finance Corp.
China Railway will take over commercial operations from the ministry, according to a March 14 cabinet statement. The authority had more than 2 million employees and 2.66 trillion yuan ($427.8 billion) of debt that’s larger than Denmark’s economy. While the government offered assurances the company will receive its backing, Premier Li said three days later that he would act when the “hand” of the state shouldn’t be involved in the market, even if it feels like "cutting one's wrist."
“Previously creditors legally had recourse to the ministry,” said Ivan Chung, a Hong Kong-based senior credit officer at Moody’s Investors Service. “While investors expect there will be very strong support from the government for China Railway Corp., they no longer have a direct claim on the government as they used to.”
The separation of the ministry’s regulatory and operating roles will bring the railways into line with other parts of China’s state-run economy, including aviation, telecommunications and energy. The break-up follows the firing of the previous rail minister in 2011 amid allegations of corruption and a high-speed crash that killed 40 people. Regulatory functions will be put into a State Railway Administration under the Ministry of Transportation, removing conflicts of interest.
The revamp won’t affect investment in railways and will help the industry to better meet market demand, former Rail Minister Sheng Guangzu told reporters on March 10. China Railway is a state-owned enterprise that will receive government support for its debt as the ministry had, according to the statement from the State Council, which is led by Li.
Three calls to the office of Sheng, who the official China Central Television reported is now the general manager of China Railway, went unanswered yesterday. Four calls to the company’s media relations department also went answered.
The average yield on the ministry’s one-year securities has slid 93 basis points since the end of 2011, after it sold a record 164 billion yuan of bonds in 2012, helping it settle unpaid bills from train and track makers.
Former minister Sheng said in January that 650 billion yuan will be spent on rail-related fixed-asset investment in 2013. China’s rail network is set to reach 120,000 kilometers (74,600 miles) under the five-year plan ending in 2015, which will extend the world’s biggest high-speed rail network.
Yields on benchmark 10-year government notes have changed little this year at 3.6 percent compared with 3.58 percent at the end of 2012, even as the nation plans to increase its budget deficit 50 percent. The yields on similar-maturity top-rated corporate bonds have fallen 12 basis points to 5.17 percent, narrowing the spread to 157, the least in more than four months.
Publicly traded railway companies such as the nation’s two biggest rail builders -- China Railway Group Ltd. and China Railway Construction Corp. -- as well as train maker CSR Corp., are likely to benefit from reduced bureaucracy, improved transparency and tariff hikes, Barclays Plc analysts led by Patrick Xu wrote in a note to clients on March 10.
“We view the reform positively,” the analysts wrote, adding that the new company can more easily restructure its assets and has more options for funding projects.
China may adjust railway ticket prices according to peak and off-seasons passenger volumes, Beijing Morning Post reported yesterday, citing an unidentified person in the industry.
Yi Gang, a deputy governor at the People’s Bank of China, said the government must clarify responsibility for the railway ministry’s debt, the official China Daily newspaper reported on March 11. Rapid rail construction means authorities must assuage concerns of financial institutions, market players and credit rating agencies, Yi was cited by the paper as saying.
The yield on the former ministry’s 2013 bonds rose to 3.78 percent on March 12, the highest in more than a month, according to Chinabond prices.
The yuan touched a record 6.2120 per dollar in Shanghai today, according to China Foreign Exchange Trade System. That’s the strongest level since the government unified the official and market exchange rates at the end of 1993.
The cost of insuring China’s sovereign debt against non-payment with credit-default swaps for five years has risen 4 basis points to 63 from a low for the year at 58.5 on Jan. 7, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The indexes typically fall as investor confidence improves and rise as it deteriorates.
Moody’s said this month China’s local-government financing vehicles, that have invested in roads, sewage works and ports, face greater risk of default. A rally in LGFV bonds may reverse, particularly should delinquencies emerge, Christine Kuo, a Moody’s analyst, wrote in an e-mailed response to questions on March 8.
The country’s budget deficit will widen to 1.2 trillion yuan in 2013 from 800 billion yuan last year, according to a Ministry of Finance report on March 5. Local governments will run a combined deficit of 350 billion yuan and the ministry will sell bonds to cover the shortfall, according to the report.
The former rail ministry’s liabilities exceed Denmark’s $333.6 billion gross domestic product in 2011. Liu Shiyu, a deputy governor of the People’s Bank of China, highlighted concerns about the debt. He received many calls from institutional investors about the rail bonds in the wake of the announcement, he said at a forum in Beijing on March 18, according to a transcript published by Sina.com.
While the securities will continue to enjoy government support, there had been speculation that some of the debt would be transferred to the transport ministry, keeping it fully under state control, according to Chai Shumao, a fixed-income analyst at China Merchants Securities Co. The credit rating of China Railway would be more or less similar to other state-owned enterprises such as State Grid Corp. of China, he said by phone yesterday.
“Given that China Railway is an enterprise with a purpose of commercial operations, the new bonds issued by the company are likely to see yields higher than those issued by the rail ministry,” Chai said.