(MENAFN- Gulf Times)
A $2.2tn superbank is feeling the pinch of China's bond slump. The yield on China Development Bank's 10-year bonds surged past 5% on Wednesday, bringing the rise this quarter to about 70 basis points. More striking has been the jump in its premium over government debt with a similar maturity, given that the state-owned lender is a so-called policy bank that aligns lending with national goals. The spread surged to 1 percentage point this week, up more than a quarter point just this month.
The latest increase comes in the wake of tightened rules unveiled this month for CDB and two sister banks, with regulators pushing for strengthened risk management.
As these lenders rely on market funding rather than deposits, the bond rout poses an increasing challenge both to their earnings and the credit they extend to everything from shantytown redevelopment to President Xi Jinping's signature Belt and Road Initiative across Eurasia.
It means rising pressure on the policy banks will pose another headwind for growth in China, which most economists see expanding closer to 6% in 2018 than the near-7% pace this year. With every sign that Xi and his team are committed to scaling back leverage, a prolonged decline in the bond market also raises the possibility of needing more capital.
'If this goes on for instance one or two more years they'll definitely lose money, said Shi Lei, chairman of Attractor Adviser Ltd, an advisory group in Shanghai. 'If they see large losses, they'll need the Finance of Ministry to replenish capital.
Because lending rates tend to rise more slowly than bond yields, the selloff could cause policy banks' spread to shrink rapidly or even become negative.
The yield on CDB's 2027 bonds fell five basis points on Friday to 4.97% as government notes also halted declines after the central bank added funds to the financial system on, taking this week's additions to a net 150bn yuan. The policy lender's plans for its usual Tuesday bond auctions omitted 10-year notes for next week's sale, according to a statement posted on the ChinaBond website late Thursday.
The other two policy banks are the Agricultural Development Bank of China and the Export-Import Bank of China. The ExIm Bank, whose 10-year yield surged to 5.1% this week, postponed a 10bn yuan ($1.5bn) bond sale scheduled for Thursday, without specifying a reason.
CDB is the giant of the three, with 14.3tn yuan of assets at the end of last year. It 'has become the main financial force behind quasi-fiscal stimulus and local government infrastructure construction in recent years, Nomura Holdings Inc China economists wrote in a note last week.
Also among its activities in recent years was extending a credit line to HNA Group Co one of several conglomerates under scrutiny from regulators according to an HNA bond prospectus. The China Banking Regulatory Commission on Nov. 15 urged CDB to focus on development work, improve risk management and establish controls based on capital adequacy, the latest move by authorities in their financial de-risking campaign.
'If stronger regulation of policy banks results in slower monetary base and infrastructure growth, it will likely be supportive of higher-grade bonds such as China government bonds over the medium term, the Nomura analysts wrote. The rise in CDB yields may start to weigh on growth, according to Hao Hong, chief strategist at Bocom International Holdings Co in Hong Kong. CDB's one-year bond yield rose above the one-year benchmark lending rate this week for the first time in data going back to 2009.
'That means technically banks can stop lending to buy policy bank bonds and enjoy very safe returns, Hong said. 'Although practically banks are not going to stop lending, the jump in bond yields will give them less incentive to lend. That will lead to pressure on economic growth and adversely affect the stock market.
The headquarters of the China Development Bank in Beijing. The yield on CDB's 2027 bonds fell five basis points yesterday to 4.97% as government notes also halted declines after the central bank added funds to the financial system on, taking this week's additions to a net 150bn yuan.
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