Rail Bonds Rally as Deadly Crash Forces Austerity, Tax Break: China Credit
Rail Bonds Rally as Deadly Crash Forces Austerity
Nelson Ching/Bloomberg
Yields on 10-year Chinese Railway Ministry bonds, which has debt equal to 5 percent of China’s economy, fell eight basis points this month to 6.22 percent, after regulators cut tax on interest income for ministry notes sold between now and 2013 by 50 percent.
Yields on 10-year Chinese Railway Ministry bonds, which has debt equal to 5 percent of China’s economy, fell eight basis points this month to 6.22 percent, after regulators cut tax on interest income for ministry notes sold between now and 2013 by 50 percent. Photographer: Nelson Ching/Bloomberg
Chinese Railway Ministry bonds are gaining for the first time in nine months as the government responds to a high-speed train crash that killed 40 by slowing spending and cutting taxes on new debt issues.
Yields on 10-year bonds of the rail operator, which has debt equal to 5 percent of China’s economy, fell eight basis points this month to 6.22 percent, after regulators cut tax on interest income for ministry notes sold between now and 2013 by 50 percent. Yields climbed 140 basis points this year, while those on similar-maturity government bonds dropped nine basis points. The ministry’s five-year debt returned 0.1 percent, compared with 5.5 percent for similar securities of OAO Russian Railways and a 4 percent loss for Indian Railway Finance Corp.
“The tax cut certainly has increased investors’ appetite,” said Lily Wei, a fixed-income manager in Beijing at Harvest Fund Management Ltd., who manages 13.8 billion yuan ($2.2 billion). “Through the new measure the government has shown investors that it supports the ministry and is prepared to take action to improve its financing.”
The government needs to regain investor confidence to pay for the world’s largest bullet-train network, after two trains collided in the eastern city of Wenzhou on July 23 because of a signal failure. The rail operator, which employs 2.1 million people and has debt totaling 2.1 trillion yuan, said it slashed spending on construction by 59 percent last month after Chinese Premier Wen Jiabao pledged to improve safety and accountability.
The yield gap between 10-year notes issued by the Railway Ministry and government bonds has narrowed from a record-high 254 basis points, or 2.54 percentage points, on Oct. 10 to 242 basis points as of 11:36 a.m. local time, according to ChinaBond. It is unclear whether the government has any obligation to repay the debt that the ministry can’t meet from its own budget, according to Southwest Securities Co. and Industrial Securities Co.
Successful Sale
The new tax measure, announced on Oct. 10, helped the nation’s biggest corporate issuer complete an auction of seven- year debt priced to yield 5.59 percent, 34 basis points lower than the yield on five-year debt sold in September. Harvest Fund Management’s Wei, who declined to detail her purchases, said she’s “bullish” on the debt.
The ministry’s spending in September plunged to 30.4 billion yuan from 73.7 billion yuan a year earlier, according to an Oct. 14 statement. Debt issuance has fallen to 159 billion yuan in 2011 from 175 billion yuan last year, according to data compiled by Bloomberg. Sales totaled 170 billion yuan in 2009.
Default Concerns
China’s rail network is set to reach 120,000 kilometers (74,600 miles) under a 2.8 trillion yuan, five-year investment plan ending 2015. That includes boosting the high-speed network, which opened in 2007, to 16,000 kilometers. China Business News reported over 10,000 kilometers of building work was halted, citing Wang Mengshu, a China Railway Group engineer.
“The amount of debt issued by the Railway Ministry is huge and people worry about defaults,” said Wang Jianhui, an analyst in Beijing at Southwest Securities. “The concern still remains on the legal status of the Railway Ministry. For a lot of investors, it’s not still clear whether it is a ministry or a corporation. It’s like a man with two faces. The long-term prospect for these bonds isn’t as good as it used to be.”
China will guarantee railway construction bonds issued by the ministry, Caixin Online reported, citing a document from the National Development and Reform Commission. Xie Xiaowen, a news department official at the ministry, didn’t reply to questions sent by fax.
Mobilized Workforce
“China will continue to support and fund railway construction,” said Tang Guohui, a bond analyst at Industrial Securities Co. in Shanghai. “Historically, the ministry has always been a powerful arm of the central government. Shortening travel time between provinces and mobilizing the workforce are two main reasons China needs a comprehensive rail system now.”
Appetite for bonds has also improved as the government eased supplies of cash on concern a faltering global economic recovery will hurt export demand. The government reported third quarter gross domestic product expanded 9.1 percent from a year ago, the slowest pace in two years.
The seven-day repurchase rate, a gauge of funding availability in China’s financial system, has fallen 556 basis points from its 2011 high of 9.04 percent. The rate gained 13 basis points today to 3.48 percent.
Yields on 10-year government bonds have fallen seven basis points this month to 3.79 percent, and reached 3.76 percent on Oct. 11, the lowest level since November. The difference between yields on 10-year notes issued by top-rated companies and government securities widened to 236 basis points on Oct. 11, the biggest gap in ChinaBond data going back to March 2006. The spread narrowed to 226 basis points today.
‘Severe’ Challenges
The cost of insuring government debt against default was unchanged at 139 basis points yesterday, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
The yuan depreciated 0.1 percent to 6.3777 today. Exports from China rose 17.1 percent in September from a year ago, the least in seven months, customs bureau data showed on Oct. 13. The bureau warned of “severe” challenges as the global economic outlook deteriorates.
“There’s been worries about the prospect of the Chinese and global economies, which is boosting the bond market at the moment,” said Industrial Securities’ Tang. “It’s a good time to buy railway bonds.”
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net
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