Mainland securities companies are striving to prop up their image following recent scandals involving bond deals. To lift market credibility, Beijing has said it will allow foreign credit-rating agencies to rate local issues for the first time. Ricky Wong / Bloomberg

Market fears called 'overblown' with projections that credit risks would be 'moderate' in 2017

Despite an unprecedented shakeup in the Chinese mainland's bond market recently as the authorities continue to prod enterprises into issuing bonds to trim their reliance on bank borrowings, experts have shrugged off fears of a bubble mushrooming in the sector.

Worries about a bubble in the country's shady bond market have escalated following recent scandals involving a Shenzhen-listed brokerage and a Guangzhou-based bank, coupled with a faster-than-expected pace of US interest-rate hikes, which triggered a record sell-off, driving both five-year and 10-year treasury futures down to their allowable intraday limits for the first time.

Sealand Securities Co Ltd, which is based in Nanning, Guangxi Zhuang Autonomous Region, was entangled in fraudulent bond deals, while Guangzhou-based China Guangfa Bank Co was found to have been allegedly involved in forged bond payments. Both incidents have cast a deep shadow over the credibility of the country's bond market.

As the mainland authorities had been encouraging companies to issue bonds to reduce their dependence on bank borrowings, including shadow banking activities, a major source of borrowed funding for the bond market, the bond business is feared to have ventured into bubble territory in the past two years.

Market analysts, however, view that worries about the mainland's credit problems that pose a systemic risk for financial markets, seem to have been overblown, convinced that credit risks would be rather moderate in 2017.

They said enterprises are expected to continue with their bond financing, especially through overseas channels in issuing US-dollar bonds.

The Chinese mainland boasts the third-largest bond market worldwide. There are currently four types of onshore (CNY) bonds - government bonds to finance government spending; central bank notes issued by the People's Bank of China for monetary policy purposes; financial bonds issued by policy banks, commercial banks and other financial institutions; and non-financial corporate bonds issued by enterprises; while so-called dim sum (CNH) bonds are issued outside the mainland and denominated in yuan.

Cecilia Chan, chief investment officer for fixed income at Asia Pacific of HSBC Global Asset Management, said although slower growth, currency weakness and onshore deleveraging pressure have exerted pressure on the mainland's credit fundamentals, she prefers mainland policy bank financial bonds to government bonds, and expects greater inflows into the onshore renminbi bond market.

Concerning credit risks, Chan argued it's important to see if defaults had been within expectations and, currently, most defaults had been within expectations, adding that if investors would like to invest in renminbi bonds, the focus should be onshore bonds although they should stay cautious and be selective.

Fan Cheuk-wan, managing director and head of investment strategy at HSBC Private Bank, expects credit risks on the mainland to be moderate in 2017 due to the higher percentage of high-grade bonds in the CNH sector, and warned that investors should stay selective and go for bonds with stronger credit fundamentals.

She remains cautious on the performance of dim sum bonds in the near term, saying that the upward pressure in both US treasury yields and onshore mainland government bond yields in the first quarter of this year would continue.

According to official figures, the mainland's total debt currently stands at 260 percent of gross domestic product (GDP) - up from 154 percent in 2008.

Fan believes that the mainland's debt-to-GDP ratio is high by international standards, but this must be seen within the context of the nation's unusually high savings rate which has stayed above 40 percent for two decades. Household debt and central government debt remains low by international standards.

Meanwhile, offshore US-dollar bonds issued by mainland financial institutions hit a new high record of $103 billion last year - about 56 percent of the total volume within Asia. And, financial institutions expect bonds insurance in 2017 to maintain a similar pattern.

JP Morgan has projected that US-dollar bonds issuance this year will reach approximately $101 billion, while BOC International forecast that US-dollar bonds issuance will go up by 10 percent to $113 billion.

Fan explained that the acceleration in bonds issuance is mainly due to looming US rate hikes and Britain's exit from the European Union.

In her view, mainland companies have been active in sourcing USD funding to finance international expansion, including overseas business development, mergers and acquisitions, and since interest-rate hike expectations have been building up since early last year, companies had sought to issue USD bonds at lower funding costs before the rate hikes came through, thus pushing up the USD bond issuance volume last year.

Fan said they see this as a tactical move by mainland companies to lower their overall funding costs by issuing hard currency bonds in low-interest rate markets like Europe.

tingduan@chinadailyhk.com

(HK Edition 01/11/2017 page9)