Global investors shun China's junk bonds

Hong Kong

YIELDS are moving in opposite directions in China's junk bond market.

Offshore, demand has weakened as escalating trade tensions and a slumping yuan dampen demand for dollar notes.

Concerns about property developers' ability to refinance is adding to selling pressure. Onshore, yields are falling as liquidity improves in the wake of a bank bailout.

Average yield on Chinese high-yield dollar bonds rose about 105 basis points since end-June, according to an ICE BofAML Index. The yield on five-year AA rated yuan corporate bonds, considered high-yield in the onshore market, fell 34 basis points during the same period, ChinaBond data shows.

Issuance of bonds rated AA or below rose to a four-month high of 22.1 billion yuan (US$4.29 billion) in August, while junk bond offerings in the greenback declined to a two-year low, data compiled by Bloomberg shows.

Depleted quotas and new restrictions on offshore issuance will also weigh on dollar bond sales from developers for the rest of the year, according to a Moody's Corp note on Friday. China's property sector makes up the majority of the Asian high-yield bond universe.

Average yields on Asian dollar-denominated junk bonds rose 77 basis points from a 14-month low in end-June, according to a Bloomberg Barclays Index. Charles Macgregor, head of Asia at Lucror Analytics, estimates yields on Chinese dollar junk bonds could rise by a further 100 to 150 basis points. "Overseas investors' concerns about the majority of Chinese-funded real estate companies have gradually increased causing them to demand a higher risk premium," said Qi Sheng, an analyst with Zhongtai Securities Co.

"These companies have encountered a tightening of overseas bond financing conditions," said Mr Qi. BLOOMBERG