China corporate financing squeezed as reform plans spark rate spike

China corporate financing squeezed as reform plans spark rate spike

Thu, Nov 21 2013

* 10-year government bond yields at 8-year high

* Market expects interest-rate reform to raise funding costs

* Spike in rates forces firms to delay bond sales

* Policymakers seek de-leveraging to avoid debt crisis

By Gabriel Wildau

SHANGHAI, Nov 21 (Reuters) – Chinese bond yields have surged as the market starts pricing in interest rate reform, a development that makes borrowing more expensive and threatens China’s fragile economic recovery. Chinese bond prices have been hammered in recent days on expectations that reforms to loosen government control of interest rates will cause funding costs to rise. Bond prices move inversely to interest rates so when bond prices fall, their yields rise.The yield on benchmark 10-year government bonds closed at 4.72 percent on Wednesday, the highest level since March 2005 and up from 3.42 percent in late May.

“Interest rates are on an uptrend because the market is pricing in expectations of deposit-rate liberalization and higher funding costs for commercial banks,” said Patrick Wu, head of China trading at J.P. Morgan in Shanghai.

In a detailed policy statement published last week following a key Communist Party meeting, leaders pledged to accelerate financial reforms, including freeing up controls on interest rates.

In comments published in a “study guide” to the reforms announced after the party meeting, central bank governor Zhou Xiaochuan said that China would achieve full interest-rate liberalisation in the medium term.

Yields began their rise in October, as expectations built that the party meeting would produce major reforms. At least 20 firms have postponed planned bond issuances this month due to the weak market, the official Shanghai Securities News reported on Thursday.

“When you look at the corporate bond market issuance plan at the end of this year, I don’t see any big state-owned enterprises coming to issue. And for the AA (rated) or below issuers, there’s limited demand in the market,” said Wu.

Indeed, the spread between five-year AA rated medium-term notes and risk-free government bonds hit 246 basis points on Wednesday’s close, the widest since June 2012. Benchmark yields on such paper hit 6.98 percent, the highest in at least a year.


In further evidence that corporate financing is getting squeezed, credit data released last week showed a slowdown in bank lending and other financing channels in October.

Despite the short-term hit to growth, less credit may be a welcome sight for policymakers, who have emphasized the need for de-leveraging.

Rating agency Fitch has estimated that China’s ratio of total debt-to-GDP, including government, corporate and household debt, will reach 218 percent of GDP by the end of 2013, up 87 percentage points since 2008. In July, the International Monetary Fund warned that similarly rapid debt run-ups have been associated with financial crises in other countries.

China’s economy grew by 7.8 percent in the third quarter, up from 7.5 percent in the second quarter. But a preliminary survey released Thursday showed that growth of China’s factory sector slowed in November, bolstering expectations the economy could lose some of its vigour in the fourth quarter.

The People’s Bank of China has also engineered a rise in short-term cash rates by withdrawing liquidity from the money markets via open market operations in recent weeks..

After withdrawing funds for four of the last five weeks, the PBOC conducted its largest weekly net injection since September this week, but short-term rates ticked up further and traders say liquidity remains tight. (Editing by Richard Borsuk)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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