Markets shrug off Chinese defaults

The Shanghai Stock Exchange building in the Pudong financial district in Shanghai. (Carlos Barria, Reuters)

The Shanghai Stock Exchange building in the Pudong financial district in Shanghai. (Carlos Barria, Reuters)

In the first trading day after the Chinese developer, Kaisa Group Holdings, reneged on its dollar debt, the Shanghai composite index climbed 1.8% to a seven-year high and China’s interbank borrowing rates dropped to a four-month low. And offshore stock-index futures held most of their gains after the Baoding Tianwei Group became China’s first state-owned company to default on a local bond.

The muted reaction in Chinese markets this week shows the government can allow defaults without sparking a financial panic that Bank of America analysts predicted last year could lead to a “Bear Stearns moment”. Policymakers have been gradually scaling back the implicit state guarantee on corporate bonds as they seek to boost the role of market pricing in the world’s second-largest economy.

“In the long run, more defaults makes China’s bond market healthier, as it makes the market more transparent and efficient,” said Liu Dongliang, a Shanghai-based senior analyst at China Merchants Bank, the nation’s sixth-largest lender by market value.
It also helps that China is easing monetary policy and the troubles at Kaisa were well flagged to investors, Liu said.

The Shanghai composite closed at its highest level since March 2008, and the Hang Seng China enterprises index gained 2.8% in Hong Kong amid speculation that the People’s Bank of China will increase monetary stimulus.

The Shanghai interbank offered rate, or Shibor, for three-month yuan loans dropped 13 basis points to 4.48%, the lowest since December?15, according to a fixing by the National Interbank Funding Centre.

“Onshore funding costs are coming down and yuan bond markets are open, which is definitely positive for the credit market and the offshore China sector,” said Owen Gallimore, the head of credit strategy for Asia at the Australia & New Zealand Banking Group in Singapore. “The PBOC has considerable flexibility and it is in an aggressive easing cycle right now.”

Credit-default swaps protecting China’s sovereign debt for five years declined for a second day to 90.8 basis points, within one basis point of their five-year average, according to prices compiled by Bloomberg. The 2019 notes of Fantasia Holdings Group, a Shenzhen-based real estate company, were steady at 88.9c on the dollar.

Kaisa bonds were trading near 56c on the dollar after becoming the first Chinese real estate company to default on its US currency debt.

The firm was unable to find the money for $52-million of interest payments after a 30-day grace period, according to a Hong Kong stock exchange statement.

Baoding Tianwei is a bigger concern for investors in China’s 35.6-trillion yuan onshore bond market because a failure to repay may bring the creditworthiness of weaker state-backed companies into question, said Yang Feng, a Beijing-based analyst at Citic Securities, China’s biggest brokerage.

The unit of the central government-owned China South Industries Group said it would fail to pay bond interest due on Tuesday, according to a statement posted to China-money.com.cn, the China Foreign Exchange Trade System website. The company said it would continue to raise funds by various means, including asset disposal.

The yield premium on five-year AA-rated bonds over top-rated notes narrowed 4.5 basis points this year to 149.8 basis points as of April ?20, according to data compiled by ChinaBond. The gap widened 11 basis points last week, the most this year, after a default by Cloud Live Technology Group, a restaurant-turned-internet firm.

Kaisa’s default, which stemmed in part from a government corruption investigation, wasn’t being viewed by investors as symptomatic of deepening risks in the broader economy, said Liu. – © Bloomberg

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