China's Bond Market Gets Reprieve From PBOC Easing

(Bloomberg) -- China’s bond market, roiled earlier this year by record defaults thanks to the government’s deleveraging campaign, is getting a reprieve.

The shift at the People’s Bank of China toward liquidity injections in recent months helped trigger a rebound in bond issuance last quarter. Companies sold 2.3 trillion yuan ($335 billion) in the period, the most in two years. Borrowing costs also dipped, with the average coupon reaching the lowest level since the start of 2017.

While the pick-up in debt financing will help the PBOC cushion growth in an economy threatened by an escalating trade war with the U.S., market players say the rising tide won’t lift all boats. Policy makers have been careful to keep stimulus measures targeted, and without a broad-based monetary easing, lower-rated borrowers are still set for tough times.

China's Bond Market Gets Reprieve From PBOC Easing

“The market has been open for refinancing -- but not necessarily to support a lot of new credit,” said Joyce Liang, head of Asia Pacific credit research at Bank of America Merrill Lynch in Hong Kong. “China isn’t at the re-leveraging stage,” she said. Liang anticipates a widening divergence between AAA rated and AA- bonds in the final quarter of the year.

Companies defaulted on 56.1 billion yuan of domestic bonds so far this year, according to data compiled by Bloomberg, a record for any previous year; China began letting companies renege on bond payments in 2014 for the first time in the modern era -- part of a broader campaign to shift the nation’s financing system toward one where borrowing costs are aligned with credit quality.

China's Bond Market Gets Reprieve From PBOC Easing

The acceleration in defaults had cast a cloud over an investment community that’s still getting used to the idea of a waning implicit guarantee from the government. Along with regulators’ moves to rein in shadow-bank financing, the deleveraging campaign not only eroded corporate-debt issuance, but sent benchmark three-year AA- bond yields up to the highest in more than three years by July.

As signs of slowing economic growth increased and trade tensions worsened, the PBOC shifted gears. In July, the central bank mounted a record injection of medium-term lending facility funds to banks. And through open-market operations, officials have pulled down interbank funding costs.

China's Bond Market Gets Reprieve From PBOC Easing

“The easing policies have to some extent relieved the pain for Chinese companies,” said Tan Yunfei, a Shanghai-based portfolio manager at HFT Investment Management Co. “The bond market is gradually normalizing. At least high-rated issuers no longer face difficulties to borrow.”

Corporate-bond issuance was led by manufacturing and food industries last quarter, while entertainment companies and power generators saw the biggest drop in coupon rates, according to data complied by Bloomberg. The sales are all the more important with bank loans under pressure -- new yuan loan growth missed economists’ estimates for August, and slowed from July.

“Chinese corporates are tapping the bond market for funding as stagnant new loan data shows banks haven’t increased the pace of lending,” said Harsh Agarwal, head of Asia credit desk strategy at Deutsche Bank AG in Singapore. With bond yields on the rise across the globe, corporate-debt borrowing cost are likely to rise over time in China as well, he said.

©2018 Bloomberg L.P.