Foreign Investors Red-Hot for Short-Term Chinese Bank Debt

By Shen Hong Features Dow Jones Newswires

Foreign investors are showing an insatiable appetite for a popular short-term debt instrument issued by Chinese banks, pushing their holdings of the high-yielding product to record levels in September.

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The strengthening of the Chinese currency this autumn has further boosted the appeal of the bond-like product known as "negotiable certificates of deposit" or NCDs. They have become an increasingly crucial tool for Chinese banks, especially small lenders, to raise funds in recent years.

Data shows foreign investors, which include global central banks and sovereign-wealth funds, were the second-biggest buyers of NCDs in September by type of investor--an unusually prominent position for them in any Chinese market.

Their holdings of NCDs, the maturities of which range from a month to a year, surged to 138.4 billion yuan ($21 billion) in the month, up 57% from 88.3 billion yuan in August--and just 2.2 billion yuan in January--according to data provider Wind Info. Foreigners' net purchases of NCDs in September totaled 50.1 billion yuan.

Though their buying has sharply increased, foreign investors still account for only 1.7% of a market that has expanded more than 13 times in size, to $1.2 trillion, since its launch in 2013.

"The yields are attractive, the yuan is strong and there's little credit risk. Of course foreigners would love buying the NCDs," said Liu Yi, a fixed income analyst at Guotai Junan Securities. Foreigners typically buy the instruments using trading accounts inside mainland China.

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Six-month NCDs issued by AAA-rated, midsize Chinese banks--the most popular category of the product--pay an average return of 4.6%, compared with 3.5% for six-month bills issued by the Chinese government. The returns are also much better than the current 1.3% yield on six-month U.S. Treasurys.

"Foreign investors still dare not touch corporate bonds here, especially the lower-graded ones, but they know Beijing won't let any of the banks fail and lead to systemic risk," said Mr. Liu.

Foreign investors have continued to pile into the NCD market even as Beijing has started to heighten its scrutiny of the sector due to concerns that banks are issuing them as a tool for leveraged investment rather than for genuine refinancing needs.

On Aug. 31, China's central bank said it would ban issuance of NCDs with maturities longer than a year.

"This is to rein in excessive borrowing by banks but the central bank is happy to see foreign investors snap up assets in China to counter capital outflows," said a Hong Kong-based banker at an Asian bank, who helps foreign investors trade in China's debt markets.

When foreign investors first expressed concerns about the safety of NCDs earlier this year, the People's Bank of China supplied them with background information and clarifications about the product, said the banker, who declined to be named.

"To a lot of them, that felt like a tacit endorsement for their future investment," the banker said.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

November 02, 2017 07:25 ET (11:25 GMT)