Tags: Investors | Risky | Chinese | Debt

Global Investors May Regret Bets on Risky Chinese Debt

Global Investors May Regret Bets on Risky Chinese Debt
(Dollar Photo Club)

By    |   Tuesday, 18 April 2017 08:09 AM

Investors reportedly may have underestimated the depth of their gamble as China’s riskiest corporate bonds are looking disproportionately expensive, as a tighter monetary policy and painful industrial restructuring weaken companies’ ability to repay debt.

“The unexpected popularity of bonds with low credit ratings in recent months, despite expectations of rising debt defaults and Beijing’s pledge to reduce leverage in financial markets, is the latest example of the constant anomalies in the world’s third-largest but still underdeveloped $9 trillion bond market,” The Wall Street Journal explained.

“Such an anomaly further distorts a market where longstanding flaws including the lack of a rigorous credit-rating system and proper pricing of risk have weakened the ability of both bond issuers and investors to gauge their future risks more accurately. Concerns about these problems remain a big stumbling block for Beijing to attract strong foreign interest despite a landmark decision more than a year ago to open its bond market to global investors,” the Journal explained.

“The gap between the average yields on five-year AA- and AAA-rated corporate bonds, a popular measure in China of how much more lower-graded debt issuers compensate investors for higher risk, has narrowed to its thinnest level on record,” WSJ.com explained.

The so-called credit spread is now 49 basis points, down from around 90 basis points in late July, shortly before Beijing started reversing an easy-money policy that has kept its economy humming along at the expense of a ballooning debt pile and inflated asset prices.

China’s central bank has made a series of moves since August—first cutting the supply of cheap short-term loans to banks and, more recently, twice raising the cost of such loans—to slow a debt-fueled investment boom.

“There’s been no notable improvement in corporate fundamentals in China, so the recent spread tightening can only be a temporary phenomenon,” said Ivan Chung, an analyst at Moody’s Investors Service.

“In many cases the spread is too tight to reflect the worrisome fundamentals of the issuers, which adds to the systemic risk in the entire bond market,” said Gu Weiyong, general manager of Ucon Investments, a Shanghai private-equity fund.

However, global investors also may be getting cold feet about American debt as well.

Foreigners sold Treasuries in February for a third straight month, data from the U.S. Treasury department showed on Monday, continuing a trend that has been in place since Donald Trump's election as president in November, Reuters reported.

The U.S. Treasury debt market showed an outflow of $13.5 billion, with both private investors and foreign official institutions such as central banks selling the country's government bonds.

"We had a significant change in sentiment on interest rates and the Federal Reserve, especially toward the end of the month, because we had good economic data," said Tom Simons, money market economist, at Jefferies & Co in New York.

"At the same time, nothing negative had come out of Washington yet and so we were still riding that optimism about Trump," he added.

(Newsmax wires services contributed to this report).

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InvestingAnalysis
Prices of lower-grade corporate bonds soar as yield spread narrows
Investors, Risky, Chinese, Debt
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2017-09-18
Tuesday, 18 April 2017 08:09 AM
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