China's 9.7t yuan debt wall seen forcing issuance rise

[SHANGHAI] China's bond issuers, faced with 9.7 trillion yuan (S$1.97 trillion) of maturing debt this year, are stepping on the gas.

Companies and governments sold 1.3 trillion yuan of onshore notes in March, about as much as in the first two months of the year combined, according to data compiled by Bloomberg that excludes certificates of deposit. Fitch Ratings expects refinancing needs to drive issuance in the coming months, with corporate debt sales for the year forecast to match or even exceed last year's total. Chinese companies issued a record 9.8 trillion yuan of bonds in 2016.

The wall of maturities gives Chinese issuers little choice but to wade into a market where the benchmark 10-year yield is near the highest in more than a year after the worst quarterly performance in at least 12 years. A Bloomberg survey last month showed that yields and money-market rates will climb further and credit premiums will widen as the central bank guides borrowing costs higher.

"For issuers, the cost of selling bonds after the December rout became much higher than their plans; for buyers, the lingering fear kept them cautious - that's why the primary market slowed down," said Ming Ming, Beijing-based head of fixed-income research at Citic Securities Co. "However, as both parties gradually get accustomed to an environment of rising interest rates, the primary market is bound to warm up."

A combination of higher costs, tighter regulatory rules and a December selloff led to an issuance drought in the first two months of 2017. Corporate bonds saw three consecutive months of negative net financing through February, with more debt maturing than was issued - the first time that has happened in data going back to 2002. Average monthly sales of both corporate and sovereign bonds slowed to 758 billion yuan in the December-February period, compared with 1.9 trillion yuan in the first 11 months of last year, data compiled by Bloomberg show.

December's rout came as Chinese policy makers intensified efforts to reduce leverage in the financial system by driving money-market rates higher. The People's Bank of China has twice raised the cost of open-market funds and medium-term loans this year, while keeping benchmark lending and deposit rates unchanged since October 2015. The Bloomberg Barclays China Aggregate Index tumbled 6.3 per cent in the last quarter of 2016, the biggest drop since its inception in 2004.

Some analysts say companies have turned to loans rather than braving the bond market.

"With the benchmark lending rates on hold, companies might as well turn to bank loans if they can," said Shen Bifan, a Shenzhen-based analyst at First Capital Securities Co's fixed-income department. "As a result, firms of relatively better credit profiles will squeeze out those which are more highly-leveraged, given lenders' limited loan quotas." Adding to the challenge is the outlook for credit premiums. The extra cost investors demand to hold five-year AA rated corporate bonds over top-grade peers will widen in the second quarter, according to 21 of 29 respondents in a March survey. The gap was at 49 basis points on Wednesday, the narrowest in at least six years.

"The unusually low credit premiums need to be corrected," said Qin Han, an analyst at Guotai Junan Securities Co. "Even though the issuance will rebound as borrowers start to accept the high costs, the pace of recovery in net financing may be capped."

An expected rise in sovereign bond issuance will help boost market activity. China's top legislature has raised the maximum limit for central government bond sales to 1.55 trillion yuan this year, compared with 2016's cap of 1.4 trillion yuan. Local governments can issue an additional 450 billion yuan of notes. This is apart from 7.3 trillion yuan of regional debt that needs to be swapped into bonds in the last year of a three-year plan.

"The slow start of corporate sales this year probably won't repeat this year, and coupled with a jump of government bond supplies, the primary market will be bustling again," said Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees about 20 billion yuan of fixed-income securities.

BLOOMBERG