Chinese companies are turning to the bond market for financing amid the biggest credit squeeze in three years, pushing relative yields toward a 17-month high.
The weighted average lending rate on bank loans rose to 6.91 per cent in March, 60 basis points higher than the one-year benchmark and 260 basis points above the yields of AAA-rated corporate bonds for the same maturity.
The premium investors demand to hold five-year corporate notes instead of sovereign debt reached 166 basis points on May 25, near the high of 169 in March.
Inter-bank borrowing costs in Shanghai have climbed to a record high after the central bank increased interest rates four times since October and boosted banks' reserve requirement eight times since November.
High bond rates
The 5.02 per cent average rate for five-year AAA bonds compares to 2.18 per cent in the US and 0.65 per cent in Japan.
"Corporate demand for capital has far exceeded banks' lending capacity this year, so for most companies bond financing becomes the only viable alternative," said Wu Haiwen, a Shanghai-based fixed-income analyst at Shanghai Pudong Development Co. "That's bad news for the market. We expect the yield spread between top-rated corporate bond and government debt to widen."
Banks are allowed to charge up to four times more than the central bank's target lending rate to price in risks and they can also set a rate as much as 10 per cent lower. About 56 per cent of loans offered in March were priced above the benchmark, the most since the central bank started to provide the data in 2008.
Yields on one-year AAA corporate bonds have climbed 172 basis points in the past year to 4.31 per cent. The yield on one-year government debt fell three basis points last week to 3.01 per cent, compared with 1.84 per cent a year ago. The 12-month Shibor rate, which measures lending costs between banks, increased to a record high of 4.8963 per cent on May 27.
China's banks doled out 2.24 trillion yuan (Dh1,26 trillion) of new loans in the first quarter, 14 per cent less than the same period a year ago. Meanwhile, domestic companies raised a net 455 billion yuan from bond sales, 70 per cent more than the first quarter of 2010, the central bank said.
Dalian Port PDA Co. sold 2.35 billion yuan of 10-year bonds on May 23 at a coupon of 5.3 per cent, and Hainan Airlines Co. sold five billion yuan of bonds on May 24, including 2.5 billion yuan of ten-year bonds at 6.2 per cent.
China's economy may expand 9.5 per cent in 2011, compared with 10.3 per cent last year, according to the median estimate of economists surveyed by Bloomberg. Inflation accelerated to a 32-month high of 5.4 per cent in March and has exceeded the government's 2011 target of 4 per cent every month this year.
The credit shortage for small and medium-sized companies is worse than during the 2008 financial crisis, when inflation reached an 11-year-high of 8.7 per cent, according to a survey by All-China Federation of Industry and Commerce in 16 provinces.
"The economy is still expanding and current rates are not yet at a level that chokes off corporate and household demand for loans," said Sheng Nan, a Shanghai-based analyst at UOB Kayhian Investment Co. "The imbalance is exacerbated as banks can no longer use off-balance sheet loans to get around lending restrictions as they did in the past."
Regulators required in January that lenders transfer 1.66 trillion yuan of off-balance-sheet loans sold as trust products onto their books by year-end. They must cut the outstanding amount of such loans at least 25 per cent per quarter.