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China cash injection eases corporate bond crunch
[SHANGHAI] China's 715 billion yuan (S$150.9 billion) cash injection into its financial system last month has helped avert a rout in the domestic corporate bond market, easing pressure on the central bank to take more aggressive action.
The spread between China's interbank market high-yield bond index and the AAA rated index has fallen 9 basis points since early May, after spiking nearly 20 basis points in the second half of April to its widest since 2012. Corporate yields have dropped sharply, with the interbank medium-term note index down 15 basis points since late April and other yield indices also broadly down.
Analysts attribute the fall in yields in part to the People's Bank of China's (PBOC) heavy late April use of its medium-term lending facility (MLF) - used to provide banks with low-cost three and six month loans.
"The government still wants to lower the cost of doing business, and the central bank has a lot of tools now like the MLF to keep money market rates stable," said Ding Shuang, Head of Greater China Economic Research at Standard Chartered Bank in Hong Kong.
Corporate debt yields - up by over 50 basis points in April in many cases - peaked on April 26 and 27 immediately after the central bank's 267 billion yuan MLF injection on April 25. The injection brought the total for April to 715 billion yuan according to central bank calculations, compared with nothing in March and just 163 billion yuan in February.
The sharp bond sell-off in April had increased the risk of a further run-up in defaults and could have forced the central bank into much more aggressive action to avert a sharp credit crunch.
More than 100 firms canceled at least US$15 billion of debt issuance in April following high profile defaults by state-owned firms like Dongbei Special Steel Group Co Ltd.
Five-year AA rated enterprise bonds, which topped out on April 26 at 4.77 per cent, have now fallen 19 basis points to 4.58 per cent, reversing almost half of last month's sell-off, which was the sharpest since 2014.
Standard Chartered's Shuang added he still expects several more reserve requirement ratio cuts by the end of the year, as capital outflows are still pressuring liquidity despite tapering off somewhat in recent months.