Record-high Chinese debt yields highlight anxiety, buying opportunity
SHANGHAI Dec 11 (Reuters) - Record high yields across a swathe of different Chinese debt instruments show how the prospect of financial reform is dramatically driving up funding costs but at the same time creating a tempting buying opportunity for yield-hungry investors.
"Short-term rates are stable, but long-term rates are steadily rising," said a trader at an Asian bank in Shanghai, who spoke on condition of anonymity because he is not authorised to speak with the media.
"I think it's a sign of uncertainty about future monetary policy."
Beijing is committed to deleveraging the economy, which entails making all forms of credit more expensive; it has done so both by directly mopping up excess cash circulating in the interbank market and by moving aggressively toward deregulating interest rates.
A Wednesday auction of seven-year bonds by the Ministry of Finance returned a yield of 4.62 percent, a nine-year high, while an earlier auction of three-month deposits on Tuesday set a rollicking historical high of 6.3 percent.
At the same time, the official Shanghai Securities News reported on Wednesday that average yields on trust loan products -- assets which comprise the backbone of China's burgeoning wealth-management product industry -- crossed 9 percent in November, their highest point this year.
Economists say the steady rise in yields over recent months is a result of a commitment to interest rate reform by Beijing, which included the rollout of negotiable certificates of deposit (NCDs) this week, considered a first step toward floating rates for one-year bank deposits, now fixed at 3 percent.
However, this does present an opportunity for new investors, who can finally snap up Chinese bonds at more reasonable prices -- many offshore investors complained that policy support from Beijing meant Chinese bonds were overpriced, given the risks.
Money dealers and forex traders believe the rising yields are also likely to encourage even more foreign hot money to flow into the country to take advantage of the combination of high rates and potential appreciation of the yuan, which has set two consecutive record highs this week.
A fund portfolio manager at a European bank said that his funds are intensely bullish on Chinese bonds at present.
"If we had to choose whether to put 100 percent of our assets in Chinese stocks or bonds, we'd go with bonds," he said.
Foreign investors so far have yet to be permitted to invest directly in bonds traded in China's interbank market, but may do so indirectly through designated funds.
Many economists believe that the aggressive set of interest rate reforms Beijing has said it will implement are ultimately bearish for bonds as an asset class, as they will introduce more risk into the equation, to the benefit of stocks.
But given that proposed stock market reforms remain to be implemented, and questions about whether Beijing really has the political will to allow public corporate bond defaults, so far the stock market has shown little sign of benefiting.
At the same time, there is little expectation that the U.S. will soon begin tapering its long-running quantitative easing programme -- which has depressed yields in the U.S. -- in the near term.
As long as the U.S. continues to pour cheap dollars into the market, investors are incentivised to park their cash in higher-yielding emerging market assets.
While bond rates rise, short-term liquidity conditions remain stable, if elevated, with the benchmark seven-day bond repurchase agreement rate sliding gradually this week to a volume-weighted average of 4.34 percent at midday Wednesday.
(Additional reporting by Chen Yixin and Gabriel Wildau)