City Banks Take Up Most of CDB Bonds

飞雪寒冰

China's city commercial banks showed strong interest in China Development Bank's latest bond issues in the absence of investment alternatives, driving down yields on the policy bank's debt, debt market participants told Caijing.

On May 12, CDB auctioned 15 billion yuan worth of 10-year floating-rate bonds at 55 basis points above the one-year benchmark deposit rate. The spread was 17 basis points lower than analysts' expectations. On April 22, the CDB also issued 15 billion yuan in 7-year floating-rate bonds for a spread of 65 basis points, also lower than expected.

A person working in the debt market told Caijing that the response to the CDB issues has been unusual with city commercial banks taking up the majority of the issue while brokerages and larger banks accounted for only a small part.

"Our previous investigations show that many of these smaller city banks have large amounts of funds that they cannot invest elsewhere."

The person noted that city commercial banks are choosing to invest their funds in medium- and long-term financial securities because they cannot compete with larger banks in providing credit for major projects.

Smaller commercial lenders are missing out on China's current credit surge, as larger state-owned lenders can accommodate the higher risks associated with extending loans to infrastructure projects backed by the government's 4-trillion-yuan stimulus plan.  

City banks and rural credit cooperatives have also turned to high-yield local urban construction bonds as possible investments, even though these may carry greater risk than previously assumed.

飞雪寒冰

China Government Securities Depository Trust & Clearing Co. (CDC), the central depository system for the Chinese bond market, said earlier this month that it had suspended its valuation of a 1-billion-yuan bond issue by Yueyang Urban Construction Investment Co., after investors said that, contrary to claims in its prospectus, the local-government run company might not own or control two major subsidiaries.

A bond trader told Caijing at the time that "A lot of urban construction-related debt, including the Yueyang bonds, do not stand up to close scrutiny."

Urban construction bonds are primarily issued by investment vehicles set up by local governments to finance infrastructure projects. Cash-strapped local governments have been stepping up such issues in order to be able to participate in infrastructure projects backed by the central government's 4-trillion-yuan stimulus package.

Bohai Securities analyst Xu Hua told Caijing that the low-yield CDB floating-rate bonds were popular because the CDB is viewed as low-risk.