China firms spurned by stock market find silver lining in bonds

[HONG KONG] Chinese companies blocked from equity financing after a stock rout are finding a silver lining in the bond market.

The average yield on AAA rated onshore corporate notes due in five years has dropped 28 basis points in the past two months to a five-year low of 4.03 per cent as equities slid. Yields on similar-maturity securities graded A, considered junk in China, have fallen to a two-year low of 10.14 per cent.

Declining borrowing costs help President Xi Jinping as he seeks to stem fallout from a share drop that wiped out more than US$4 trillion and prompted regulators to curb initial public offerings. Investors are plowing into fixed-income products as an alternative to volatile stocks, even after the number of borrowers hit by rating downgrades jumped 21 per cent in the first half amid slowing economic growth.

"At a time that equity issuance is banned the bond market remains open for business at yields that are quite low on a historical basis," Michael Shaoul, the chief executive officer at New York-based Marketfield Asset Management, wrote in a note. "It is not a guarantee of a benign outcome this time around but it is a reason to be hopeful." Issuance of yuan-denominated corporate notes has surged to 6.7 trillion yuan (S$1.53 trillion) this year, close to the 7.3 trillion yuan for all of 2014.

"Key reasons for the bond rally are the pessimistic outlook for the economy and the decline in stock and commodity prices," Qu Qing, the chief credit analyst at Huachuang Securities, wrote in a note.

China's benchmark Shanghai Composite Index remains down 25 per cent from its June 12 peak. That's even after the gauge surged 4.9 per cent on Monday on speculation authorities will start a new round of consolidation among state firms.

Any continued improvement in the stock market could make the bond rally temporary, according to Huachuang's Mr Qu.

"If the stockmarket rebounds, the regulators could allow IPOs again," he said. "That could boost risk appetite again and hurt bonds."

BLOOMBERG