China's Debt Default Risk Climbs to Highest Since June 2013

Updated on
  • Investors use CDS to express negative view on China: JPMorgan
  • Government bonds declining for a third straight week

The cost of insuring Chinese sovereign debt against default climbed to the highest level since a record cash crunch in June 2013 as a slowing economy erodes confidence in the nation’s assets.

Credit-default swaps protecting government bonds against non-payment for five years rose for a fourth day on Wednesday to 140 basis points, according to prices from data provider CMA. The contracts increased 19 basis points in January, the biggest jump in 16 months. Government notes are falling for a third week.

The world’s second-largest economy grew 6.9 percent in 2015, the slowest pace in a quarter century, and expansion will ease to 6.5 percent this year, according to a Bloomberg survey of economists. In a sign of worsening outflows, the People’s Bank of China sold a record amount of foreign currency in December, more than twice as much as in any previous month. It also gave guidance to some Chinese lenders in Hong Kong to suspend offshore yuan lending to curb short selling.

“The increase in the CDS is an expression of the sovereign risk outlook,” said Ben Sy, head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong. “China’s slowdown has a lot of impact on global markets, so even global funds need to hedge a hard-landing case in China, and if you want to express a macro view, CDS is still one of the cheapest ways to hedge it.”

The seven-day repurchase rate, a benchmark gauge of interbank liquidity, rose five basis points to 2.46 percent in Shanghai, according to a weighted average from the National Interbank Funding Center. It had climbed to double digits in June 2013 amid a cash crunch engineered by the central bank.

The PBOC injected 80 billion yuan ($12.2 billion) to the banking system using 14-day reverse-repurchase agreements on Thursday, while adding another 70 billion yuan via 28-day contracts. The central bank will conduct open-market operations daily between Jan. 29 and Feb. 19, apart from during the week-long Lunar New Year holiday that begins Feb. 7. The usual auction windows are on Tuesday and Thursday.

The yield on the benchmark 10-year notes has risen five basis points this week to 2.89 percent, ChinaBond data show.