China pide paso... II

antiestéticars Rise as China's Yields Soar
By SHEN HONG
Nov. 25, 2013 1:31 p.m. ET

SHANGHAI—Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing's relentless drive to tighten the monetary spigots in the world's second-largest economy.

The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.

The slowing pace of bond sales from earlier in the year is reviving worries of reduced credit and soaring funding costs that were sparked in June, when China's debt markets were rattled by a cash crunch.

The rise in borrowing costs and shrinking access to credit could undercut the recent uptick in China's economy that global investors in stock, commodity and currency markets have cheered. Wobbly growth in China could undermine economic recovery in the rest of the world.

"If borrowing costs don't fall in time, whether the real economy could bear the burden is a big question," said Wendy Chen, an economist at Nomura Securities.

Chinese bond yields are rising amid a lack of demand among the big banks, pension funds and other institutional money managers, analysts say. These investors, traditionally the heavyweights in China's bond market, have seen their funding costs rise in tandem with interbank lending rates, which are controlled by China's central bank. The country's bond market is largely closed to foreign investors.

The yield on China's benchmark 10-year government bond was at 4.65% Monday, down from 4.71% Friday. Last Wednesday's 4.72% was the highest since January 2005, according to data providers WIND Info and Thomson Reuters. The record is 4.88% set in November 2004. Bond yields and prices move in opposite directions.

"The recent sharp rise in bond yields was mostly due to worsening funding conditions and growing expectations for a tighter monetary policy as Beijing seeks to deleverage the economy," said Duan Jihua, deputy general manager at Guohai Securities.

As government-bond yields have risen, the average yield on debt issued by China's highest-rated companies rose to 6.21% as of Friday—the highest since 2006, when WIND Info began compiling the data.

Last week, China Development Bank, one of the nation's largest issuers and regarded as one of the most creditworthy, delayed a planned bond sale by two days and cut the size of the offering from 24 billion yuan ($3.9 billion) to 8 billion yuan. China Development Bank supports funding for China's major infrastructure projects.

Also cutting the size of a debt offering last week was another regular issuer, Export-Import Bank of China, according to people familiar with the deal. The Agricultural Development Bank of China, which helps fund the development of China's vast rural areas, has postponed its borrowing plans indefinitely, according to bankers familiar with that deal. Export-Import Bank and Agricultural Development Bank weren't available to comment on their plans to issue bonds.

According to the latest data from Financial China Information & Technology Co., bond issuance in China totaled 687.36 billion yuan last month, down from 785.88 billion yuan in September and 822.14 billion yuan in August. It also represents a 24% drop from April's 908.13 billion yuan, which was the most of any month this year.

The Chinese government's tolerance for higher financing costs comes amid a broad effort to lessen the economy's dependence on cheap credit and to rein in the riskiest types of lending.

Chinese officials have expressed concern about the debt burdens carried by local governments. Also, in the past few years, regulators have cracked down on "shadow banking," practices that bypass China's strict lending and capital restrictions.

The interest rate banks in China charge each other to borrow money rose to an annualized 5.94% on Nov. 18, the highest since June 27. Since June's cash crunch ended with China's central bank injecting more cash into the financial system, the interbank lending rate has averaged 4%. This compares with around 3% earlier in 2013 and 2% to 3% in recent years.

The People's Bank of China uses tools such as short-term loans and bills to manage the supply of cash in the interbank market on a weekly basis. The interest rates it sets on such instruments dictate those that banks charge each other for loans.

"We expect the central bank to maintain its current tight policy stance in the next few months because of the need to rein in financial risks stemming from local-government debt and shadow banking," said Nomura's Ms. Chen.

To be sure, some experts say that the rise in yields is just a road bump as China charts its course toward a more market-oriented economy. Bond issuance in China is still higher than last year—7.18 trillion yuan in the first 10 months of 2013, compared with 6.24 trillion yuan in the same period of 2012.

In recent months, Beijing has given financial institutions more latitude in setting both lending and deposit rates. A blueprint for further reforms issued a week ago, after the conclusion of a once-a-decade meeting of the country's leaders, reinforced the government's commitment to loosening its grip.

Additionally, inflationary pressures give the PBOC another reason to maintain a hawkish stance, analysts say. A key measure of inflation, China's consumer price index, spent most of the year rising at a rate of less than 3% but has lately accelerated. Consumer inflation clocked in at 3.1% in September and 3.2% in October.

Some analysts say the PBOC could be prompted to take action to bring yields lower.

"As the rising yields are increasing the financing and credit risks for corporate borrowers, the PBOC may not be able to afford to sit idle for too long," said Terry Gao, senior analyst at Fitch Ratings.

Still, many Chinese investors are watching to see how high yields must climb in order to lure buyers. Competition from high-yielding wealth-management products that are bought and sold in the "shadow banking" system is fierce, says Wang Ming, a partner at Shanghai Yaozhi Asset Management, which oversees 2 billion yuan in assets.

Even the Chinese government is having a tough time selling debt. In October, China's Ministry of Finance sold 28.25 billion yuan of one-year debt offering an interest payment of 4.01%. That is the highest rate since 1996, when a similar debt offering sported a 12% interest payment. Offers to buy the bonds roughly matched the number of bonds available, according to the Finance Ministry. Analysts said that typically demand for such bonds has been about double the supply.

"Although bond yields are already at historically high levels, demand from big investors like banks remains lackluster," Mr. Wang said. "It can't be ruled out that yields may rise further."

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