China’s $11.6 trillion bond market eerily quiet as defaults spike

China’s local credit market has rarely been stronger, avoiding a record rout in global bonds, as the country’s central bank goes its own way of easing policy while others tighten.

This contrasts with some of the worst distress ever in Chinese offshore banknotes – marred by a housing debt crisis, geopolitical tensions and a broader global sell-off in fixed-income securities triggered by inflation.

The divergence raises questions about how long China can continue to insulate its yuan-denominated corporate bond market as liquidity shortages hit more developers. At the same time, the split creates opportunities for Chinese investors who can bear the risk, as some seek bargains overseas.

Bloomberg’s China Credit Tracker points to the widening spread. Stress for local bonds eased to the lowest possible level of 1 in September from 2 the previous month, due to fewer onshore defaults since February as companies prioritized payments to mainland creditors. Yuan spreads also narrowed, after the People’s Bank of China eased policy to hedge against property market woes.

In contrast, the stress gauge for Chinese offshore banknotes worsened to the maximum level of 6 from 5. These dollar bonds fell 3.5% in September, the biggest fall since 2013, the global rout of fixed income securities also took their toll.

Dive into Bloomberg’s China Credit Tracker methodology

The divergence has generally continued since China returned from a public holiday in the first week of this month.

Local spreads remain close to recent lows as the PBOC maintains its accommodative monetary policy. This is a far cry from the international situation, where rate hikes by other central banks have pushed yields higher.

China-specific concerns are also driving the prices of dollar junk notes from borrowers in the country to historic lows.

One of the triggers was an emblematic promoter of the difficulty in stemming the real estate crisis. CIFI Holdings Group Co., a Shanghai-based builder that priced a state-guaranteed ticket last month, found that even that was not enough to stop the distress. A director said CIFI defaulted on a convertible bond and the company warned it could face a similar fate on offshore debt if its obligations were not met.

It’s also worrying for the onshore market, as CIFI was among a small group of developers selected for a new program to secure guarantees from a state-backed company for the sale of yuan debt. When this program appeared in August, it sparked a broader rally that has now faded.

Despite the pain in Chinese dollar headlines, there is some interest from mainland bargain hunters struggling with weak local yields.

“Onshore money is flowing into high-quality offshore dollar credits, especially notes sold by state-backed companies, as the different political stances have created very attractive buying opportunities,” Ting said. Meng, senior Asia credit strategist at ANZ Bank China Co. Mainland inflows are “significant enough to shore up this part of the investment grade credit market,” she said.

Tracking issue

Monthly bond maturities for Chinese companies that may struggle to repay

Investors are now watching for more political support. In late September, the central bank and top financial regulator asked China’s six largest banks to offer at least 100 billion yuan ($14 billion) each in financial support to the real estate sector.

The Communist Party Congress twice a decade in the coming days is also a focus. Any further measures to support demand for home sales would be particularly welcomed by credit traders.

Provincial distribution

Fujian leads all mainland provinces with the most onshore defaulted bonds

Note: The map shows the onshore Mainland Chinese bond market. Figures are in billions of yuan. Source: Bloomberg

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