As other major states face pressure with their sovereign bond sales, one country appears to be defying the odds — not only in size of issuance but success — China. As Merrill Lynch Bank of America (MLBoA) highlights in a recent report, the development of China’s bond market has been nothing short of breathtaking:
The total outstanding amounts now stand at CNY15tn, or US$2.18tn, of which sovereign bonds account for US$1.37tn. Excluding bills with maturity of less than one year, total size is US$1.64tn.
Over the last four years, the stock of government bonds has more than doubled from CNY2.4tn to CNY4.9tn. In addition, in order to mop up the liquidity generated by FX intervention the central bank has issued bills with maturity up to three years. The stock of these more than tripled from CNY1.32tn to CNY4.45tn. Issuance by ‘government policy banks’ (China Development Bank, China Import and Export Bank, and China Agriculture Development Bank) and other banks has shown a similar trend of nearly tripling from CNY1.5tn to CNY4.2tn.
Reuters reports that on Tuesday China’s Ministry of Finance further announced it would auction 22bn yuan ($3.2 bn) of 30-year bonds next Wednesday.
Regional governments, meanwhile, have also actively been pumping out paper. On Tuesday the Finance Ministry announced a further 9bn yuan ($1.3 bn) of three-year bonds to be sold on behalf of the Sichuan regional government next Tuesday and 5bn yuan of three-year bonds on behalf of the Henan regional government on Friday.
Growth has even been seen across the corporate sector in 2009, as the chart below demonstrates:
And as part of China’s funding of its stimulus up to 200bn yuan of local-government issues have also been approved, although it is here, if anywhere, that failure might ensue according to MLBoA. As they explain:
In terms of credit quality, the risk of default is low because the role Ministry of Finance plays and the way local tax revenue is handled between the central and the local government. The first issue of CNY3bn by Xinjiang Autonomous Region was well accepted with a spread of 1bp to central government bond. The bid-cover ratio at 2.07 is on par with government bond. However, the good result does not dismiss the general lack of trust in local governments’ finance status because there are many parties who want to see and want to insure an initial success. As such, it will be interesting to follow the market development. Although the probability is low, setting a credit spread so narrow does risk an auction failure, which the authorities certainly would not welcome.
Related link:
China: ‘Can I super-size my stimulus?’ - FT Alphaville