Cross-posted from Investing in Chinese Stocks.
Jiangsu govt bond issued at 100. Sina shows no trades, but:
In the days after the deals printed, the secondary market has shown precisely what it thinks about the pricing of these bonds. Many haven’t traded at all – private investors are clearly giving them a wide berth – while those that did trade have tanked. Jiangsu’s 10-year bond, issued with a 3.41% coupon, has plunged almost three points in the first days of trading – a major drop in bond markets, and usually a sign underwriters got it wrong. The bonds were bid at a yield of 3.75% on Wednesday.
Balding’s World reckons:
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This is quite surprising and has numerous interesting implications if this continues. If this is true, this is imposing significant capital losses on Chinese banks already struggling with rising (even very generously defined) non-performing loan rates. While Chinese banks and regulators adhere strictly to the international “mark it at whatever we feel like today even if they haven’t paid us for a year” accounting standard rather than GAP or IAS, even by their own standards bonds available for trade should be marked to market. Banks may not be trading the newly issued bonds due simply to the fact that this would require them to recognize significant losses that are at the moment not explicit but would become explicit if the bonds are traded or available for trading. Furthermore, given their funding costs, this essentially gives the banks a near zero margin on government debt straining their resources when they can least manage it.
Another possibility is that there is some short term delay in using the loans as collateral with the PBOC as promised. Given what was announced about the overall debt restructure and the time lag, it is distinctly possible that final details of the PBOC collateralization have yet to be finalized and debt essentially moved onto the PBOC balance sheet. Due to the lack of trading and drop in price, it seems likely that banks will hold on to the debt for sometime or wait for the PBOC to open the promised lending facilities required to redeem the provincial bonds.
This comes as China is preparing to double the size of the market, adding another 1 trillion yuan in bonds.
