Chinese corporate bond financing hit a record low in May, as a market rout discouraged new issuance while a wave of previously issued notes came due.
Net corporate bond financing — new issuances less maturities — totalled negative Rmb217bn ($31bn) in May, well below the previous record low of negative Rmb89bn in February, according to data from Wind Information.
A “regulatory windstorm” led by China’s ambitious new banking regulator, Guo Shuqing, has targeted banks’ use of borrowed money to invest in bonds. The People’s Bank of China has also drained liquidity from the money market, making it more expensive for banks to borrow from each other to fund bond purchases.
“Banks’ demand for bonds has drastically reduced. The shock has been pretty large,” said Xu Hanfei, chief fixed-income analyst at China Merchants Securities in Shanghai. “Pressure has spread from the liabilities side to the asset side,” he said, referring to the impact of higher funding costs on demand for bonds.
The benchmark yield on Chinese five-year notes rated double-A has risen steadily since late last year, hitting 5.7 per cent on Tuesday, its highest level since January 2015 and up sharply from 3.43 per cent in late October, according to China’s main bond clearinghouse.
Investors are also nervous about rising credit risk. According to a survey of investors by Haitong Securities, only 5 per cent of bond investors are “optimistic” about low-rated corporate bonds. Companies cancelled or postponed 400 planned bond sales worth Rmb390bnbn in the year to May, up from Rmb286bn in cancellations a year earlier, according to Wind data.
Tighter rules on bond investment in part of a broader effort to control risks from shadow banking. Leveraged bond investments are typically packaged into structured notes products and sold to consumers, companies and other banks as wealth management products.
“In the context of the increasing financing difficulty for bonds and non-standard (shadow bank) products, issuers of low quality are more severely impacted, and the corresponding credit risks tend to increase,” Haitong chief economist at Jiang Chao wrote this week.
To some extent, would-be bond issuers have compensated for the lack of bond financing with loans from banks and non-bank lenders. Overall corporate and household financing — including banks, shadow banking and capital markets — rose 11 per cent through the first four months of this year from the year-earlier period.
But banks may not be able to continue taking up the slack. Small and medium-sized lenders, whose access to customer deposits is limited, increasingly rely on money markets to fund both loans and bond investment.That means tighter liquidity and stricter regulation of interbank borrowing hinders their ability to offer loans.
The central bank’s new Macro Prudential Assessment framework, which took full effect this year, has limited banks’ freedom to increase loans and shadow-bank activity.
“As banks’ demand for bonds falls, other channels can’t fully make up for it. Banks’ credit quotas are quite tight, and there’s also pressure from MPA,” said Mr Xu.
Additional reporting by Nan Ma