BlackRock Sees Growth Surprise as Bond Risk Slides: China Credit

BlackRock Inc., the world’s largest asset manager, expects China’s economy to “surprise on the upside” for the rest of the year, after the cost of insuring the nation’s debt fell the most in Asia this quarter.

China’s credit-default swap contracts have declined 39 basis points since June 30, the most of any major sovereign in the region, according to data provider CMA. The extra yield Chinese borrowers pay over Treasuries to raise dollars in the debt market dropped 44 basis points in the same period to 362 on Sept. 16, the lowest since January, according to JPMorgan Chase & Co. indexes. That exceeds the 17 basis-point decline for all Asian issuers.

Bank of America Corp., UBS AG and ING Groep NV have raised China’s growth forecasts for 2013 after factory output expanded the most in 17 months in August, even as other Asian nations grapple with slowdowns. Regional currencies rallied on expectations Federal Reserve Chairman Ben S. Bernanke’s decision last week to maintain quantitative easing will staunch a $50 billion flow from emerging-market funds since May.

“China seems to be the one bright spot now,” said Suanjin Tan, a Singapore-based Asia fixed-income portfolio manager at BlackRock. “Emerging-market tourists are finding it more attractive to invest back home, unless the surprise decision by Mr. Bernanke not to taper QE sends them back into the hunt-for-yield paradigm.”

Rising Output

Industrial production in China rose 10.4 percent in August from a year earlier, the National Bureau of Statistics said in a statement in Beijing on Sept. 10, beating the median 9.9 percent forecast of 45 analysts surveyed by Bloomberg News. A separate manufacturing gauge rose to a six-month high in September. The preliminary reading of 51.2 for a Purchasing Managers’ Index released today by HSBC Holdings Plc and Markit Economics advanced from 50.1 in August.

UBS boosted its outlook earlier this month for the nation’s economic expansion in 2013 to 7.6 percent from 7.5 percent, citing the stronger-than-expected factory production. ING increased its forecast for the year to 7.7 percent from 7.5 percent, while Bank of America now projects 7.7 percent growth, up from 7.6 percent, according to e-mailed notes.

“Stability is very important from a market standpoint and that’s what we seem to be getting now,” said Kaushik Rudra, the global head of credit research in Singapore at Standard Chartered Plc. “That is providing a decent backdrop for all China-related risk.”

Weaker Credit

Swap contracts insuring the nation’s debt against non-payment have fallen from a high for the year of 147 basis points marked in June, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the private market. Concerns some companies may miss debt payments had mounted at that time, as Premier Li Keqiang engineered the country’s worst cash crunch in at least a decade.

“That was an attempt to try to send a message to the banking system that it would not allow unchecked credit growth indefinitely,” said Geoffrey Lunt, a Hong Kong-based senior product specialist of fixed income at HSBC Global Asset Management. The company oversees $413 billion globally. “It was a difficult period and the authorities have learned from that.”

Although China is forecast to expand more than any other major economy at 7.5 percent this year, that would still be the least in more than two decades.

The slowdown will contribute to weaker credit profiles for some companies, particularly in coal, metals and mining, and transportation, Standard & Poor’s said in a statement last month. The impact will be uneven, with oil and gas refiners and telecommunications providers among the strongest, it said.

China Value

The yield on 10-year benchmark government bonds has climbed 54 basis points to 4.05 percent this quarter, according to Chinabond indexes. Top-rated corporates are also paying more for domestic debt with yields rising 55 basis points to 5.678 percent, near the highest since October 2011, the indexes show. The yuan closed at 6.1212 per dollar in Shanghai on Sept. 18 before the two-day Mid-Autumn Festival holiday.

UBS sees value in BBB rated centrally controlled Chinese state-owned enterprises and is overweight on the nation’s property developers, Edwin Chan, head of Asian credit research at the Swiss lender said late last month.

China Orient Asset Management Corp., which purchases, manages and disposes of non-performing loans, led $2.1 billion of U.S-currency note sales by Chinese and Hong Kong companies this month, already the most since May, data compiled by Bloomberg show.

China Ping An Insurance Overseas Holdings Ltd., a wholly owned subsidiary of Ping An Insurance Group Company of China Ltd., planned to meet investors last week after setting up a $2 billion medium-term note program, a person with knowledge of the details said at the time. China National Offshore Oil Corp. and China General Nuclear Power Corp. are also planning meetings, separate people said.

Recent signs of improvement in the Chinese economy have been encouraging, according to HSBC Global Asset Management’s Lunt. “I don’t think the world has to be scared of a slowing Chinese economy,” he said.

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