China Bond Trading Dives; Cheapening Bond Prices Fail to Whet Investors’ Appetite

China Bond Trading Dives

Cheapening Bond Prices Fail to Whet Investors’ Appetite


Dec. 2, 2013 4:31 a.m. ET

SHANGHAI—Trading volume in China’s bond market has plummeted in recent months, in another reminder of how the country’s shifting interest-rate environment has taken a toll on a once fast-expanding financial sector.Despite the series of largely uninterrupted selloffs that have sent bond yields to multiyear highs, cheapening bond prices have failed to whet investors’ appetite. Total trading volume in China’s interbank market, which accounts for the majority of all bond trading in the country, totaled 1.74 trillion yuan (US$285.71 billion) last month, well below the year’s peak of 8.26 trillion yuan in March.

Although trading volume was up slightly from 1.41 trillion yuan in October, it was a fraction of the 7.14 trillion yuan a year earlier as many investors remain wary of a tightening monetary policy and are attracted by higher returns offered by competing products in China’s poorly regulated shadow banking system.

Between July and November, the average monthly trading volume was 1.41 trillion yuan, down sharply from 5.25 trillion yuan in the first half of the year and an average of 6.15 trillion yuan in 2012.

The steep decline since July shows how the unprecedented cash crunch in China’s financial system in June has fundamentally changed the landscape of the country’s money and bond markets, as rising interest rates threaten companies’ fundraising needs and reshaped investment decisions.

“Basically there have been structural changes in China’s bond market, with the People’s Bank of China reducing its frequency of liquidity injection so as to deleverage the economy and slow the growth of credit,” said Suan Teck Kin, economist at United Overseas Bank Ltd.

The Chinese central bank has maintained a largely hands-off approach in the money market since the June credit crunch, allowing borrowing costs to soar from time to time as lenders scramble to find cash to meet demands ranging from tax collection to preholiday gift purchases.

As a result, the yield on China’s benchmark 10-year government bond hit 4.72% Nov. 20, marking the highest since January 2005, according to data providers WIND Info and Thomson Reuters. The record is 4.88% set in November 2004. Bond yields and prices move in opposite directions.

The yield has since retreated after the usual month-end seasonal cash demand subsided and the PBOC injected funds into the system when the selloff in bonds started to look destabilizing for the financial system and the broader economy. It stood at 4.45%, up from 4.38% Friday.

“Major bond investors like banks and insurance companies are all ignoring bonds because the products are no longer offering high-enough yields,” said Xue Hexiang, analyst at Guotai Junan Securities.

In comparison, risk-prone but higher-yielding choices like wealth management and trust products are much more attractive to such investors, analysts said.

The recent selloff has also prompted waves of redemptions by Chinese bond funds, many of which have suffered deep losses following the June credit crisis, Mr. Xue said.

Ironically, the popularity of such off-balance-sheet products, which help banks bypass China’s strict lending and capital restrictions, is part of the reason why Beijing is increasingly tolerant of higher financing costs—higher costs help contain risky lending. The authorities also want to use rising market interest rates to lessen the economy’s dependence on cheap credit.

In recent months, Beijing has also given financial institutions more latitude in setting both lending and deposit rates. A blueprint for more aggressive economic and social reformsissued last month, after the conclusion of a once-a-decade meeting of the country’s leaders, reinforced the government’s commitment to loosening its grip.

The interest rate banks in China charge each other to borrow money rose to an annualized 5.94% on Nov. 18, the highest since June 27. Since June’s cash crunch ended with China’s central bank injecting more cash into the financial system, the interbank lending rate has averaged 4%. This compares with around 3% earlier in 2013 and 2% to 3% in recent years.

The rate was at 4.63% Monday, down from 4.72% Friday.

“I think the current situation will likely continue next year and it will take several months for the market to absorb the new environment of higher interest rates,” said UOB’s Mr. Suan. “Unfortunately companies will have to embrace things like this.”

But to some observers, the recent spike in China’s government bond yields could be a welcome sign of much-needed structural changes to the way how credit risks are priced in the world’s second-largest economy.

In a recent research note, ANZ economists said China’s bond yields may be mispriced under a controlled interest rate environment. “As a result, the yield curve may not be useful in pricing risks of different tenors and types of bonds,” they said.

Due to an abundant credit supply and limited investment channels in the past decade, Chinese banks often bought government bonds and held till maturity, an approach that may have artificially depressed bond yields, ANZ said.

“This situation started to change dramatically this year, as commercial banks found more investment vehicles,” ANZ said.

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.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: