Bond selloff in China's most prolificdebt

3 minutes
Bond selloff in China's most prolificdebt

A Bond Selloff in two of China's most prolific debt issuers is broadening concerns over contagion risks in the $862 billion market.

Bonds of China Evergrande Group, Asia's largest seller of negative dollar debt, have plunged in recent weeks amid a barrage of junk-rated news. That adds to the sense of unease created by China Huarong Asset Management Co., one of the biggest issuers of financial securities, as the company's failure to release financial results sparked speculation about a possible debt restructuring. Both companies have about $21 billion of government bonds.

While China's credit market is no stranger to bouts of volatility, the fresh wave is challenging long-held assumptions that the state would bail out investors in the country's biggest firms. The government has offered little in the way of public support for Huarong as it tries to balance financial stability and reducing moral hazard. The regulators have instructed Evergrande's major creditors to conduct a fresh round of stress tests on their exposure to the firm, people familiar with the matter have said.

We now have two different companies into the China investment grade and high-yielding dollar bond markets causing major losses for investors, said Owen Gallimore, head of trading strategy at the Australian New Zealand Banking Group. In portfolios similar to Huarong, you will find highly liquid Evergrande bonds in most places of the world.

Concerns about Huarong's future are already spreading to peers. China Orient Asset Management Co. and China have told the banking regulator that they are concerned about losing access to offshore funding because of the turmoil around Huarong, Bloomberg News reported last week.

On Wednesday, officials said a former Orient executive is under official investigation on suspicion of corruption. According to a statement by the Communist Party's anti-corruption watchdog, Hu Xiaogang, now a vice president at Great Wall Asset Management Co., is being probed on suspicion of's severe disciplinary and law violations.

The longer-dated dollar bonds are still trading well below par with the note due 2025 at 75.4 cents on the dollar and the 4.5% permanent bond at 70.4 cents.

Evergrande's 10-inch Dollar Note due 2025 rose to 73.7 cents, a tick higher than the eight-month low of the day before, Bloomberg-compiled markets show. Its share - stocks went down in Hong Kong on Wednesday morning to as much as 3.8%. The stock has plunged to 58% in July from its peak of 2008.

The meltdown of Evergrande shares and bonds highlighting the growing pressure on Chinese developers as Beijing tightens the screws on leverage in the home sector. At the end of last year, the company remained in breach of all official metrics for reducing debt levels - known as the 'three red lines'. Evergrande is trying to halve its borrowings over the next two years roughly.

The Selloff of developer developments worsened last week after Evergrande report on WeNews that the banking regulator is examining more than 100 million dollars of transactions between Evergrande and Shengjing Bank. Shengjing holds large amounts of bonds issued by Evergrande, WeNews said. Evergrande is the biggest shareholder of the bank.

Shengjing Bank said on Monday that its business with Evergrande is in accordance with the laws of this country. Evergrande and its subsidiaries have $1.5 billion in bonds to use this year and another $7.4 billion next year according to data compiled by Bloomberg.

According to IHS Markit Ltd. data received on Monday, the short interest in Evergrande shares has climbed 2 percentage points since low May to 8.6% of free float.

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