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China Market Updates (09 Nov 2015 - 15 Nov 2015)

Published time:[20 Nov, 2015 16:59] From:E Fund Management (HK) Co., Limited

Weekly China Market Updates (09 Nov 2015 – 15 Nov 2015)

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Market Review

China announced its reopen of the market for initial public offerings on November 6th after the four months long suspension. China’s equity market rebounded and ended the recent bond market rally. Over the week, China Bond Composite Total Return Index declined by 0.455 points, or 0.27%, from 171.17 to 170.71. 10Y Treasury Yield (CUTB 10) stayed almost unchanged at 3.123%.

Source: Bloomberg 15 Nov 2015

The People Bank of China injected 20 billion thru 7D reverse repo operations on the open market with rate 2.25%. This was also the second week that PBoC didn't supply or drain liquidity from the market. But liquidity condition remained loose over the week and 7D repo rate stayed flat at 2.35%.

Source: Bloomberg 15 Nov 2015

IPO resumption and Fed December rate hike news drove the short term yield curve up. Over the week 1 Y Treasury Yield was up by 9.59 bps to 2.56%, while 10 Y Treasury Yield stayed unchanged at 3.123%. Yield curve flattened a lot, and now the yield spread between 1Y and 10Y Treasury Yield narrowed from 66.2 bps to 56.6 bps. 

Source: Bloomberg 15 Nov 2015

Hong Kong listed China Shanshui Cement Group defaulted on a 2 billion short commercial paper (SCP) due on November 12, marking it the first SCP default in China. Shanshui has been mired in a shareholder fight for control since April amid President Xi Jinping’s call to cull weaker firms in industries grappling with overcapacity. Its largest shareholder Tianrui International Holding Co. has been trying to change Shanshui’s board. While the company has been seeking funding since June, all the financial institutions it contacted have expressed concern in relation to the uncertainty of the management. Tianrui has proposed to remove Shanshui board members including Chairman Zhang Bin. Shanshui will hold an extraordinary general meeting on Nov. 25 to consider the resolutions proposed by Tianrui. We believe that Shanshui default is an exceptional case, the credit event will not trigger a sharp correction to the credit bond market. The spread between 5 year AA credit bond and 5 year policy bank bond stayed almost unchanged at 134.28 bps.

Source: Bloomberg 15 Nov 2015

October macro data did not help to ease the slowdown concern on China economy. The sharp decline in food price dragged the CPI inflation down to 1.3% YoY from 1.6% YoY in September, while the PPI inflation stay unchanged at -5.9%. Although producer price deflation may moderate a bit in Q4, we believe that gauge will continue to stay in the negative territory as manufacturing factor show no sign of improvement in the near future. Industrial Production growth softened to 5.6% YoY in October from 5.7% YoY in September, lower than the consensus forecast of 5.8% YoY. We believe that weak domestic and export demand, as well as volatile commodity prices will continue to weigh on IP growth. Retail sales growth stayed strong and the gauge edged up to 11% YoY in October from 10.9% YoY in September, we believe the upward trend will be maintained in the fourth quarter.
China’s monetary data surprised the market with both new loans and total social financing were markedly below expectations. New loans halved to 513.6 billion from 1.05 trillion in September, but still up by 10.3% YoY. Total social financing slumped to 476.7 billion, down 63% from September and 30% from a year ago. Both data indicated that the financing demand from the corporate side had been weakened.

Source: Bloomberg 15 Nov 2015

Market Outlook

China domestic bond defaults are forecasted to climb after the several credit events happened recently. Compared to the market in the early 2010s, credit events are becoming more and more frequent, 16 bonds have defaulted or failed to pay due interest since the beginning of 2014. But at the same time, the credit bond market sector is taking increasing percentage of the bond market, market size has been growing from 20.69% in 2010 to 40.04% in 2015 Q3. Having around 9500 credit bonds in the whole bond market, default ratio in the past two years was only 0.19%, much lower than any other developed markets. Investors are now starting to have growing concern that the bond market is not pricing default risk properly, but if we also take the fact that most of the "defaults" finally payed their debt into consideration, credit spread is more reasonable than it seems.

Key market changes

Source: Bloomberg 15 Nov 2015

Source: Bloomberg 15 Nov 2015

Source: Bloomberg 15 Nov 2015

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