Yield squeeze hits China debt sales
Bonds Policy bank postpones issue after asset-management rules rock credit marketBy INA ZHOUChina’s domestic bond rout
deepened last week after the
country introduced guidelines
to revamp the massive
asset-management industry,
prompting issuers – including
a big policy bank – to postpone
offerings.
EXPORT-IMPORT BANK OF CHINA had
been due to sell up to Rmb10bn
(US$1.5bn) of domestic notes
on Thursday, but called off the
deal late on Wednesday after
heavy sell-offs in the domestic
bond market that day.
Yields on Chexim’s 10-
year notes jumped 13bp on
Wednesday to 5.00%, their
highest level since 2014.
Meanwhile, Chinese 10-year
treasury bonds touched a three-
year high of 4.03% last week.
Bankers expect market
conditions towards the year-end
to be worse for primary deals as
investors close books and large
banks hoard cash.
“We cancelled half of the
deals planned last week. I thinkwe are pretty much done for
this year,” said a Shanghai-
based underwriter at a Chinese
bank.
Over the past month, another
policy lender, CHINA DEVELOPMENT
BANK, reduced the sizes of its
bond offerings at least twice.
Meanwhile, CHINA ZHESHANG BANK
cancelled a Rmb10bn offering
planned for November 17.
In the corporate sector, so far
this month at least 25 issuers,
including CHANGDE ECONOMIC
DEVELOPMENT INVESTMENT GROUP,
have already postponed their
bond offerings, according to the
Shanghai Clearing House.
China’s onshore yields have
been rising since September as
the economy turned out to be
more robust than the market
had expected. The yield on
10-year government bonds has
risen 40bp since the end of
September.
Still, market participants
blamed worries over tighter
rules on the AM industry for
the plunge in the bond market
last week.Concerns over a sustained
bond sell-off in China bled into
the country’s stock markets on
Thursday, dealing blue-chips
their worst one-day loss in
nearly 18 months.
The blue-chip CSI300 index
tumbled nearly 3% to 4,103.
points on Thursday, its biggest
one-day drop since June 13
2016, while the Shanghai
Composite Index slid 2.3% to
3,352.99 in its worst day since
December.TIGHTER RULES
Analysts said China’s draft
guidelines to revamp the
asset management business,
which some estimated to be
around Rmb100trn in size,
had intensified worries over
liquidity conditions at the year-
end.
The People’s Bank of China
on November 17 issued
sweeping guidelines in a
renewed effort to rein in the
risky shadow banking sector,
which had been channelling
money into Chinese stocks,bonds and property.
The draft guidelines,
which unify rules on asset
management products from all
types of financial institutions
and set leverage ceilings, will
not have an immediate impact.
There will be a transition
period until June 30 2019.
“With detailed rules on
how to regulate the asset-
management products to be
introduced and implemented
over time, they will continue
to weigh on the bond market,”
said Xiangcai Securities in a
note.
Analysts at China Merchants
Securities estimated that
about Rmb10trn of the asset
management products were
invested in domestic bonds as
of the end of 2016, of which
about Rmb2trn-Rmb3trn was
invested in rates (treasuries,
policy banks, muni bonds, etc),
and around Rmb8trn-Rmb9trn
in corporate bonds.
“Demand for bond allocation
is likely to be curbed, and
money will return to lower-
risk assets from high-yielding,
non-standard assets with poor
liquidity,” said Jiang Chao, an
analyst with Haitong Securities,
in a note. Turkey to test Japanese appetite
Bonds EM sovereign to return to Samurai market with dual-tranche offeringBy TAKAHIRO OKAMOTOThe REPUBLIC OF TURKEY is set to
return to the Samurai market
for the first time since 2014,
in a test of Japanese investor
appetite for emerging-market
credits.
Turkey, rated Ba1/BB/BB+,
began sounding out investors
last week for a two-tranche
private placement of Samurai
bonds, according to sources.
A tranche of 10-year bonds,
with a partial guarantee from
Japan Bank for International
Cooperation, was being
sounded out at around 0.53%.
The other, without a JBIC
guarantee, involves three-year
notes at a range of 170bp-190bparea over yen offer-side swaps.
Investors told IFR that the
10-year tranche should draw
plenty of demand, but the
three-year piece would be a
test of how much demand
the issuer would be able to
draw from Japanese investors
without JBIC’s help.
Investor sentiment is not
necessarily favourable towards
Turkey, as evident in the recent
move in its currency. The
Turkish lira hit a record low
of 3.98 against the dollar last
week due to concerns over the
country’s relations with the
US, domestic deficits, and the
independence of its central
bank.
As the upcoming offeringis in the private placement
format, not a public offering,
asset managers are unlikely to
buy. They usually do not buy
private placement bonds, as
these are not added to Nomura
BPI, Japan’s widely used bond
index.
“Asset managers like us
probably wouldn’t buy it,”
said a domestic asset manager,
but he speculated that Turkey
would not attempt a non-
guaranteed tranche if there
was no demand. “Perhaps,
lead managers already see
some demand from certain
investors.”
Turkey privately placed
Samurai bonds four times after
the 2008 financial crisis, butthree of them came with a
partial JBIC guarantee.
The first of those trades
priced on March 11 2011,
the day when a devastating
earthquake and a tsunami
hit north-eastern Japan, and
comprised ¥180bn 10-year
bonds. It sold ¥90bn of 10-year
bonds in March 2012 and, most
recently, a ¥100bn 10-year in- JBIC guaranteed 95% of
the obligations of the 2011 and
2012 Samurai offerings and 90%
of the 2014 issue.
However, Turkey, without
any help from JBIC, issued
¥18.4bn of 20-year Samurai
bonds in 2013, according
to Thomson Reuters data,
showing that there is investor
demand for the standalone
credit.
Official marketing on the
upcoming offering is expected
to begin this week.
International Financing Review Asia November 25 2017 11For daily news stories
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