Asia Finance Blog

Asia markets follow US lead and tumble

Government bond sales to pick up in China, corporate bond see a downturn

China needs to speed up the pace of bond sales in the second half in order to meet the government’s 2006 money supply target, says a Bank of China report. According to the report, the central bank should drain at least 1.3 trillion yuan worth of money through debt sales during the July-December period to achieve its money supply target. This will require the central bank to more than double the pace of bond sales.

At the same time, the pace of corporate bond sales in China has eased due to the slow regulatory approvals for the same. Regulators are going slow on approvals for new corporate bond issues as a part of tightening measures to control investment. China's National Development and Reform Commission (NDRC) has temporarily slowed its review of this year's second batch of corporate bond issues, according to several market sources. Corporate bonds are an important means for companies to finance their projects. In light of this fact, it is therefore obvious that they have come under the radar of the government’s macro-controls. Apart from slowing approvals, the tightening move is draining liquidity from the local market and pushing the market rate higher, thus raising the cost of borrowing. In June, only four companies issued corporate bonds, as compared to eight in May and nine in April.

Thus, while China will see a lot of government bond issues in the second quarter, its corporate bond issues will continue to be on a slow track.

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Moody’s revises outlook on China’s foreign currency bond rating

Rating agency Moody’s has revised outlook for China’s A2 foreign currency bond rating to positive from stable. The revision in outlook reflects China’s success in controlling its overseas debt and its strong balance-of-payments position.

China’s strong external position based on its robust forex reserves and external payments position insulates it from external shocks and leaves very little chance that the country will default on its foreign loans. China boasts of forex reserves of USD 925 billion, the largest in the world. China's current account surplus in 2005 rose 133 per cent to USD 160.8 billion, pushing its overall balance-of-payments surplus to USD 224 billion.

While bad loans still continue to be a major problem with Chinese banks, the government’s efforts to curtail the same are bearing fruit. China has spent about 18 per cent of its 2005 GDP to bail out banks since 1998. This has helped cut the bad-loan ratio for Chinese commercial banks to an average 8 per cent as of March 31, from 28 per cent in 2003. China’s rising surplus has contributed in a major way to cut the bad debt at commercial banks.

Moody’s has indicated that if China continues to make progress on its overseas debt, currency reserves and bank bailout fronts, there is a possibility of winning a higher debt rating. China's success in reforming its financial system to meet World Trade Organization commitments will also influence whether its rating is raised to A1 in the near future. China’s geopolitical equations will also be crucial in determining its rating.

Moody's has also revised the rating outlooks on China's policy banks and state-controlled commercial banks to positive from stable. Among the state-controlled commercial banks, Bank of China (BOC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Agricultural Bank of China (ABC) have had a revision in outlook. Among policy banks, Moody's upgraded the ratings outlook on China Development Bank and Export-Import Bank of China to positive from stable. The outlook change applies only to the banks' foreign currency debt and deposit obligations. The bank financial strength ratings that reflect their standalone credit quality, remain unchanged.

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CITIC to sell USD 186 million worth of bonds

CITIC Securities, China’s biggest, listed brokerage house is planning to sell USD 186 million worth of bonds to fund acquisitions, boost working capital, and help it compete with foreign investment banks.

CITIC Securities is a wing of China International Trust & Investment Corp, the country’s biggest state-run investment company. It is one of the few profit making brokerage houses in the Chinese brokerage industry, which is fraught with losses largely due to reliance on trading commissions for the bulk of their income. The industry suffered a combined loss of USD 1.8 billion in 2004. CITIC Securities plans to expand in keeping with the government’s move to reinforce the country’s brokerage industry.

In September 2005, CITIC Securities acquired Gold Stone Securities Co for USD 98.27 million. A month prior to this, it had acquired debt-ridden Huaxia Securities Co in collaboration with Jianyin Investment Holding Co, a subsidiary of China’s national bank. The company’s future plans include acquiring CITIC Capital Markets Co, CITIC Capital Securities Ltd and CITIC Capital Futures Ltd from CITIC Capital Markets Holdings Co for USD 380 million. It will infuse USD 38.5 million into its Hong Kong unit, CITIC Securities (HK) Ltd, who will in turn sell a 20 per cent stake to CITIC Capital Markets for the three units. By combining the equity businesses of CITIC capital and CITIC Securities, the company plans to form a unique full-scale platform, which will enable it to take advantage of the domestic and foreign markets.

The company is expected to grow at over 50 per cent, and it wants to continue this momentum going by funding its acquisitions and gaining a foothold in the exponentially growing Asian markets.

China gives go-ahead for ‘panda’ bonds

Towards the end of last month, China opened its domestic debt market to the Asian Development Bank and International Finance Corp (IFC), allowing them to raise a little over 2 billion Yuan in debt. These agencies will be the first to pioneer the Yuan-denominated, ‘panda’ bonds in the Chinese market. IFC will use the proceeds of the Yuan bonds to finance private-sector projects in China.

The introduction of these bonds is expected to give a much-needed fillip to China’s relatively weak bond market. China will eventually allow foreign non-financial companies, including multinationals, to issue Yuan bonds. This, it hopes, will help the bond market achieve trading volumes needed to create a sound yield curve that lenders can use as a benchmark when pricing risk. Success of the panda bonds could help China cut its balance of payments surplus over time, because raising funds at home naturally reduces capital inflows. Though the panda bonds are not expected to impact the Yuan immediately, analysts view that they will help relive upward pressure on the Yuan over time.

China’s debt market in underdeveloped and there is heavy reliance on bank lending. These factors can lead to a financial crisis as seen in the case of the Asian financial crisis 1997–98. Introduction of panda bonds will help establish an advanced institutional framework, with features like credit ratings and intermediaries. Without doubt, this is a landmark step taken by China to boost its secondary market.

 

China introduces nation’s first asset-backed bonds

China has taken an important step towards developing its bond market with China Development Bank, a state-owned lender that funds public works projects, planning to sell 5.3 billion Yuan, or USD 655 million, of asset-backed securities in the country's first such sale. The securities, based on 62 loans offered to 12 industries from electricity to construction, would be sold to institutional investors that trade on the interbank market.

In June, regulators selected China Construction Bank, the nation's third-largest lender, for a pilot asset-backed program, part of the efforts to develop the market and reduce risks for banks. The program's goal is 15 billion Yuan worth of asset-backed issuance in the near future. Another bank hoping to offer asset-backed securities is China Construction Bank (CCB), the country's largest property lender. Its securitization plans are expected to focus on personal home loans.

China, which is one of the fastest growing economies and the one with huge potential, has one major drawback, the absence of a strong financial sector. The country’s banks are plagued with bad loans and the secondary market is in the stage of infancy. Development of bond market will help China clear bad loans from corporate balance sheets and to reduce the dependence of companies on banks for financing. Though investors are currently rushing to China because of the country’s huge potential, they are likely to feel the heat if the system collapses just like in the case of Japan.

A solid financial sector is essential for any economy to sustain its growth and attract investors for the long-term. China’s banking reforms and its recent moves in the financial sector indicate its willingness towards creating a strong, transparent and developed market.

China takes a serious look at its markets

Chinese authorities have taken a slew of measures to accelerate the development of the interbank bond market. Noting the importance of risk-management securities, China has started bond forward trading on its markets. The central bank in May announced its approval of forward trading as it would help traders hedge risks and improve liquidity in the interbank market. This move is not only a positive step towards the development of other needed derivatives but will also help form a market-oriented bond pricing system.

Bonds for Bund?

Following a 1995 bond futures trading scandal, China had shut its bond futures market and barred trade of financial derivatives, limiting exchanges to handling futures based on commodities. Shortage of investment tools and increased risks due to heavy inflows had necessitated the traders to have some hedging mechanisms in the bond market. Poor performance of equity markets and the property market entering a downtrend also saw lots of money flowing into the bond market. Market players had been trying to hedge risks through the use of repurchase agreements, or repos. The new contracts and accompanying regulations would not only be a better way to mitigate risk, but also help strengthen the price-discovery function of the market.

The China Securities Regulatory Commission (CSRC) is also seeking the development of share index besides treasury bond futures. In a recent development, the central bank allowed more financial institutions, including financial firms affiliated to group companies, to issue bonds for the first time, and ushered in the market’s first overseas institutional investor – the US$1 billion ABF Pan-Asia Bond Index Fund.

China seems to be keen to accelerate development of its bond market in order to reduce the economy’s over-reliance on the banking system. China’s banking system, burdened with massive non-performing loans, still accounts for more than 80 percent of the funding that is supporting the rapid growth of the local economy. Under the circumstances, China seems to be hitting the right chord this time around.