Tags: Dollar | Borrowing | Costs | Tumble | Ratings | Outlook | china

China's Dollar-Borrowing Costs Tumble on Ratings Outlook

Tuesday, 02 Nov 2010 07:38 AM

China’s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world’s fastest-growing economy win a higher debt rating.

The yield on China’s $1 billion of 4.75 percent notes due October 2013 dropped 31 basis points last month, or 0.31 percentage point, to 1.46 percent, according to Royal Bank of Scotland Group PLC prices. The extra yield over similar-maturity U.S. Treasuries narrowed 15 basis points to a three-month low of 95.

Lower yields and shrinking spreads “reflects the fundamental healthiness of the Chinese economy, the sovereign creditworthiness of China and, of course, money flooding into emerging markets,” said Tao Dong, chief regional economist at Credit Suisse Group AG in Hong Kong.

China’s manufacturing expanded at the fastest pace in six months in October, the logistics federation said yesterday, after the economy grew 9.6 percent in the third-quarter and Moody’s Investors Service said Oct. 18 it may raise China’s rating on the country’s financial strength.

Falling benchmark borrowing costs would help companies such as Sinochem International Corp., China’s biggest chemicals trader, which plans to sell 10- and 30-year notes, according to a person familiar with the matter.

Evergrande Rally

Yields on Chinese corporate dollar-denominated bonds fell to 5.18 percent last month, the lowest in at least five years, according to JPMorgan Chase & Co. indexes. The yield on the Chinese bonds with the heaviest weighting in the index, Guangzhou-based-Evergrande Real Estate Group Ltd.’s $1.35 billion of 13 percent notes due January 2015, declined to a record 10.3 percent as the prices of the securities rose.

Sinochem hired Citigroup Inc., HSBC Holdings Plc and UBS AG to help arrange a benchmark dollar bond sale after meetings with investors in Asia, Europe and the U.S., the person familiar with the matter said on Oct. 26. The person declined to be identified because the terms of the bond sale weren’t set. Benchmark issues are typically at least $500 million.

Dagong Global Credit Rating Co., the Chinese firm seeking to become an alternative to Standard & Poor’s, Moody’s and Fitch Ratings, ranks China’s debt higher than that of the U.S. and Japan, citing widening deficits in the developed world. The global ratings methodology is “irrational,” Dagong Chairman Guan Jianzhong said in July, and “cannot truly reflect repayment ability.”

Lowest BRIC Yield

China’s October 2013 note offers the lowest yield of similar-maturity dollar bonds sold by the so-called BRIC nations. Brazil’s $1.25 billion in 10.25 percent notes due June 2013 yield 1.59 percent, according to JVB Financial Holdings prices, while Russia’s $2 billion in 3.625 percent debt due April 2015 yield 3.1 percent, according to RBS.

India hasn’t sold any dollar bonds, and the 0.75 percent U.S. Treasury due August 2013 yielded 0.45 percent yesterday in New York, according to data compiled by Bloomberg.

Officials overseeing the world’s second-biggest economy stepped up efforts last month to cool inflation even as the U.S. and Japan favor near-zero interest rates and money-printing to try to stimulate growth. China’s economy will probably expand 10.5 percent this year, the International Monetary Fund said on Oct. 6. The U.S. will grow 2.6 percent, down from an earlier 3.3 percent estimate, the Washington-based fund said.

Default Swaps

Five-year credit-default swaps on China’s debt fell 9 percent last month following a drop of 19 percent in September. The contract rose 1.1 basis points to 60.3 basis points yesterday, CMA prices in New York show.

The swaps typically rise as investor confidence deteriorates and fall as it improves, paying the buyer face value in exchange for the underlying securities or cash equivalent should a government or company fail to adhere to its debt agreements. Government debt investors usually buy the contracts to hedge against a rise in yields.

The yield on the 3.28 percent government bond due August 2020 rose 1 basis point yesterday to 3.71 percent, the highest level for a benchmark 10-year note since January, Interbank Funding Center data show.

One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, climbed 2 basis points to 2.37 percent yesterday, after reaching a four-month high of 2.38 percent Oct. 20. Five-year swaps gained 5 basis points to 3.49 percent. That rate is up from this year’s low of 2.68 percent on Aug. 12, according to data compiled by Bloomberg.

Yuan Appreciates

The yuan appreciated 1.86 percent versus the dollar since a two-year peg was relaxed in June, and non-deliverable forwards show traders are betting on a 3.9 percent increase in the coming 12 months. It weakened 0.5 percent to 6.7015 per dollar yesterday in Shanghai, according to the China Foreign Exchange Trade System.

Moody’s said on Oct. 18 that it may raise China’s A1 credit rating, citing the nation’s “effective policy response and rapid recovery from the global recession.” The nation is well placed to sustain “rapid rates” of economic growth, while low central government debt and deficits funded by domestic creditors also enhance credit quality, according to the risk assessment firm.

An upgrade may have few benefits because China’s dollar bonds are “quite illiquid,” said Vijay Chander, head of credit strategy at Standard Chartered PLC in Hong Kong.

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China s U.S. dollar borrowing costs fell in October by the most since January as investors bet record currency reserves of $2.65 trillion will help the world s fastest-growing economy win a higher debt rating.The yield on China s $1 billion of 4.75 percent notes due October...
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Tuesday, 02 Nov 2010 07:38 AM
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