Chinese President Xi Jinping speaks at the podium during the meeting between members of the standing committee of the Political Bureau of the 20th CPC Central Committee and Chinese and foreign journalists at The Great Hall of People on 23 October 2022 in Beijing, China. (Photo: Lintao Zhang / Getty Images) Boosted by a slew of easing measures to support a slowing economy, some key onshore corporate-bond yields have been at their closest levels to comparable Chinese government debt in about 15 years. The spread for five-year AA rated yuan notes was 106 basis points Friday, the smallest since 2007 according to data compiled by Bloomberg. The premiums are about 0.5 basis point wider than their recent similar lows for benchmark three- and five-year AAA rated bonds.
AA rated onshore notes are mostly issued by local-government financing vehicles, said Hao Yang, fixed income analyst at Nanjing Securities Co. The spread tightening isn’t a result of credit quality improving “but due to the abundant liquidity and the near-term faith on such notes,” he said. “This situation may continue as the property crisis is unlikely to see a big turnaround and the economy remains stressed.”
China’s onshore credit market has seen increasing calm over the course of 2022, despite the unprecedented tumult in mainland firms’ offshore bonds. Real estate firms have defaulted at a record pace and average dollar-note prices are at record lows.
But helping soothe domestic corporate debt has been the country’s divergent monetary policy from other nations, which has pushed yields lower onshore as authorities seek to support a slowing economy. Gross domestic product grew at a better-than-expected 3.9% rate in the third quarter, according to delayed figures released Monday, though that’s below a 5.5% full-year target set early in 2022. Just-released September readings on unemployment and retail sales painted a weaker picture.
Risks could be mounting in the local credit market, and authorities have been releasing measures in efforts to avoid potential fresh debt troubles. For example, the Ministry of Finance recently tightened rules involving local governments’ land purchases amid efforts to deal with off-balance-sheet borrowing.
“The lack of high-yield assets available has increased market demand for high-yield LGFV bonds,” said Beijing BG Capital Management CEO Li Gen. “Current low spreads don’t reflect the true credit risks for such notes as local governments’ fiscal pressure is increasing.”