ECONOMY

China sovereign bonds: sale marks inflection away from financial infection

China has no problem borrowing funds from foreign investors. Demand for the government’s US dollar bond sale was six times greater than the $4bn of securities on sale. The credit risk associated with Chinese sovereign bonds remains very low. Evergrande obsessives hoping for signs of contagion from the floundering property giant must look elsewhere.

If China is flirting with systemic instability, it certainly did not show in the bond pricing. The three-year tranche yielded just 0.06 of a percentage point over its US counterpart. The spread for the 10-year was 0.23 of a percentage point. How it has narrowed. The yield premium to the 10-year US Treasury was 1.5 per cent as recently as March.

That tighter spread is justified by better macro fundamentals. Total debt as a percentage of China’s gross domestic product is declining. Beijing has been working hard to stabilise the country’s growing debt pile. Export growth remains strong, up 28 per cent in September from a year earlier.

The current account surplus doubled to 1.8 per cent of GDP last year. GDP growth for this year is expected to be 8.4 per cent, according to Fitch. That would be the highest in the world.

Beijing’s regulatory crackdowns, power shortages and slowing local property market are overhangs. Still, the fallout from the latter and the ongoing Evergrande crisis has so far been limited to a narrow group of property sector bonds and stocks. Trading in shares of the indebted property group remains halted. Evergrande bonds trade at 20 cents on the dollar.

Despite missed payments by Evergrande and smaller peers, warnings of doom have proved alarmist. Outside property, there are few signs of contagion.

The government bond sale shows how fast the confidence of foreign investors is recovering. Over three-quarters of investors in the 30-year bonds, the longest maturity, are outside Asia. China’s foreign exchange reserves are up this year and the renminbi is at a four-month high. The correlation with comparable assets is appealingly low. Expect more buyers to snap up Chinese sovereign bonds.

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