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China Bond Selloff Spreads to High-Grade Tencent, Banks

Chinese Investment-Grade Dollar Bonds Slide Most Since April

China’s higher-quality dollar bonds are suffering their worst selloff in about seven months as property woes spill into the broader credit market. 

Spreads on the investment-grade notes -- which account for the bulk of offshore dollar securities from Chinese issuers -- widened about 8 to 10 basis points Tuesday, traders said. That would be the biggest daily expansion since April after a widening of 7 basis points Monday, according to a Bloomberg index. 

The selloff has moved well beyond China’s higher-quality property names. Tencent Holdings Ltd.’s dollar bond spreads widened 12 basis point to 137 basis points Tuesday, set for the biggest jump since July. Financial issuers are also slumping, with the yield premium on a Bank of Communication Hong Kong note widening about 10 basis points.

China Bond Selloff Spreads to High-Grade Tencent, Banks

Signs are spreading of contagion from debt crises in China’s property sector, which has been grappling with a clampdown on excessive leverage and liquidity woes at real estate giant China Evergrande Group. The fallout had until recent days been largely contained to junk-rated developers. But investors have since grown increasingly concerned about the impact on larger property firms and the broader economy. 

“We believe some form of government policy easing or intervention is ultimately inevitable, at which time Chinese dollar bonds should rebound strongly,” said Mark Reade, head of fixed-income desk research at Mizuho Securities Asia. “However until then, the path of least resistance for Chinese credit spreads is wider.”

China Bond Selloff Spreads to High-Grade Tencent, Banks

Authorities have sought to limit the fallout, with the central bank injecting liquidity into the financial system. That’s largely succeeded in keeping the onshore credit market calm. But the contagion to investment-grade offshore securities is concerning because they make up nearly 70% of the $870 billion market for all Chinese dollar notes.

The moves have left average yield premiums for the bonds set for a blowout of some 27 basis points over four straight days in the sharpest such spike since April, when concerns about China Huarong Asset Management Co. shook the market. 

The spreads are already at their widest over respective Treasury notes in at least five months, the Bloomberg index shows. Real estate makes up 10% of the index, the second largest weighting after financial services firms.

©2021 Bloomberg L.P.