China’s Junk Yield Climbs as Regulators Boost Scrutiny

China is stepping up scrutiny of its bond market after regulators asked insurers to monitor their debt holdings and as the yield on short-term junk notes jumped this week by the most since December.

China Insurance Regulatory Commission told insurers to be aware of the risks in their debt investments, especially in local government financing vehicles, the Shanghai Securities News reported. Planned debt investments by insurers amounted to 287.8 billion yuan ($46.2 billion) in 2013, equal to all of the past seven years combined, the report said.

One-year AA- bond yields climbed 11 basis points this week to 6.76 percent through yesterday, the highest level since Feb. 26, according to Chinabond data. That’s 364 basis points more than government debt, the widest in a month. In China, notes ranked AA- and below are equivalent to non-investment grades globally, according to Haitong Securities Co.

“There’s growing pressure on the bond market because liquidity is generally tighter and sentiment has been affected lately,” Ivan Chung, a senior credit officer in Hong Kong at Moody’s Investors Service, said by phone. “March and April is also typically a peak season for refinancing.”

Credit stress increased this week after closely held Zhejiang Xingrun Real Estate Co. collapsed. Shanghai Chaori Solar Energy Science & Technology Co. missed part of a payment on 1 billion yuan of bonds March 7, the first default in China’s $4.2 trillion onshore bond market.

No Risks

The Shanghai Stock Exchange yesterday extended a trading halt on notes sold by Baoding Tianwei Baobian Electric Co. after losses at the solar-cell maker widened in 2013. Premier Li Keqiang said last week that default in some financial products may be unavoidable.

China hasn’t found any default risks this year among corporate debt sold with approval from the National Development and Reform Commission, China Securities Journal reported this week. The threat of nonpayment in the corporate bond market rises as economic growth and property investment slow, it said in a front-page commentary.

Manufacturing in the world’s second-largest economy probably contracted for a third straight month in March, economists forecast before a March 24 report from HSBC Holdings Plc and Markit Economics. A government report on March 8 showed exports shrank 18.1 percent in February from a year earlier, the most since 2009.

(Corrects story of March 21 to reflect Chung works at Moody’s.)
Before it's here, it's on the Bloomberg Terminal.