China banks forced to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt

November 19, 2013 9:34 am

China banks forced to delay bond issues

By Paul J Davies in Hong Kong and Simon Rabinovitch in Shanghai

China Development Bank and fellow state policy lender Agricultural Development Bank of China have had to delay or dramatically reduce Chinese bond issues as the impact of a tight onshore credit market begins to be felt. The China Railway Corporation, another state entity, was forced to delay a deal recently, while well-known private companies including the electric carmaker BYD and internet company Baidu also saw deals delayed over the summer, according to bankers familiar with the situation.Issuers are dealing with a string of problems stemming from the drying up of interbank market liquidity and fierce competition from wealth management and trust products for investors’ funds.

CDB, the policy bank whose credit profile is as good as the government of China itself, was forced last week to cut a proposed Rmb24bn ($3.9bn) deal by 60 per cent to Rmb10bn and pay a yield of more than 5.5 per cent.

“Chinese 10-year Treasury bond yields are at a six-year high and are up about 100 basis points versus a year ago,” said one senior bond banker in Beijing. “CDB’s yields have widened by a bit more than 100 basis points and other corporate bonds are seeing yields rise by 150-200 basis points.”

The head of fixed income sales and trading at a European bank in Shanghai said the policy banks pre-disclose their issuance plans, so it is easy to see when they delay. “But for most corporations, they just quietly delay their issues and no one knows that except for the underwriter.”

“Government and policy banks have suffered the most. Now pressure is coming to corporates,” he added. “It’s going to end pretty ugly unless PBOC [the central bank] changes its attitude to liquidity.”

For financial companies such as banks and insurers, total onshore issuance so far this year of $26.8bn has fallen short of just the final quarter of last year, when $32.3bn of deals were done, according to Dealogic. August, September and October this year were particularly weak, although issuance has recovered a little in November.

For other companies, issuance so far this year of $24.5bn is far behind last year’s $39.7bn total, according to Dealogic, and again September and October were especially weak.

Government and policy banks have suffered the most. Now pressure is coming to corporates

– Shanghai-based banker

Zhang Zhi Ming, head of China research at HSBC, said a combination of the slowdown in the economy and the policy responses were exacerbating the funding shortage in the economy.

“China is much more funding dependent than in the past – total social financing is set to hit a new record of Rmb18tn-Rmb19tn this year up from the Rmb15.8tn record set last year,” he said.

China’s bond markets have exploded in recent years from next to non-existent before the global financial crisis. The total of non-financial corporate debt outstanding in China is already as large as that in the US, whose bond markets have grown up over decades.

However, a big problem for Chinese issuers right now is the tougher competition from alternative fixed income investments, such as wealth management and trust products, which offer yields of 8 or 9 per cent and are guaranteed by the issuing banks.

Banks are also doing more interbank business because the current tight supply of liquidity means it creates much higher returns than bonds.

“Interbank lending can generate returns of more than 6 per cent for three months . . . So why bother buying commercial paper for 5.5 per cent for a year?” asks the Shanghai-based banker. “Midsize banks like Industrial and Minsheng are reducing the portion of bonds they’re holding.”

Mr Zhang backs up this view. “Funding costs for smaller banks are much higher and so they would prefer to invest in credits with yields above 6.5 per cent yields.”

Chinese issuers are papering over the difficulties with more offshore issuance, raising a record $51.6bn outside China so far this year, according to Dealogic, a record figure and more than double the $24.5bn raised in the same period last year.