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Mainland bonds become good bet

10-12-2010 11:42 BJT

HONG KONG - At a time when governments around the world are facing growing debt, mainland bonds are becoming almost as safe as US Treasuries in the market for insuring against defaults.

Mainland bonds have become cheaper to insure than those of the United Kingdom and France since August as the fastest-growing economy surpassed Japan to become the world's second largest.

"Right now the strongest balance sheet in the world is China's," Daniel Arbess, a manager who runs the $2.1 billion Xerion fund for Perella Weinberg Partners in New York, said in an interview with Bloomberg Television on Thursday.

The change in debt insurance costs "shows a global rebalancing", Brayan Lai, a Hong Kong-based credit analyst at Credit Agricole CIB, said in a phone interview. "I wouldn't rule out its debt being deemed safer than Treasuries."

China's economy will probably expand 10.5 percent this year, the International Monetary Fund (IMF) said last week, reiterating its July forecast. US gross domestic product will increase 2.6 percent, down from a 3.3 percent growth estimate three months ago, the Washington-based fund said.

China controls the world's biggest holdings of foreign-exchange reserves, with about $2.5 trillion, including at least $846 billion of US Treasuries, according to data compiled by Bloomberg. Government debt will amount to 22 percent of GDP this year, compared with 94 percent in the United States, 85 percent in France and 82 percent in the UK, according to IMF forecasts.

While credit-default swaps place China next to the US, its bonds are still discounted next to Treasuries.

China's $1 billion of 4.75 percent bonds due October 2013 rallied in the past month, sending the yield down 17 basis points to 1.54 percent, according to prices compiled by Bloomberg. The extra yield investors require relative to Treasuries widened 14 basis points to 88, according to JPMorgan's EMBI Global Index, reflecting a plunge in US yields.

China's debt has returned 8.3 percent this year, compared with 15 percent in Brazil and 12 percent in Russia, JPMorgan indexes show.

A ratings increase may make it cheaper for Chinese companies to borrow overseas. Yields on the 6.375 percent bonds due March 2012 declined five basis points last week to a record low of 1.47 percent, according to data compiled by Bloomberg.

The IMF's steering committee said over the weekend it would "deepen its work" on capital flows, exchange-rate movements and the accumulation of reserves, focusing on the US, China, the UK, Japan and the eurozone.

Foreign-exchange reserve figures for the third quarter will probably be released this week, which will indicate "the size of hot capital flows into the economy", London-based Capital Economics Ltd wrote in a report dated Monday. A separate government report will probably show property prices climbed 8.9 percent in September from a year earlier, according to a Bloomberg survey of economists.

The nation's improving credit comes as Chinese policymakers promote greater use of the yuan overseas to reduce reliance on the dollar. The government since the start of 2009 has approved the currency's use to settle cross-border transactions, opened its interbank bond market to overseas financial institutions and sold yuan-denominated debt in Hong Kong.

"Chinese policymakers want to be seen as a stabilizing factor," said Jerome Booth, who helps oversee about $35 billion as head of research at Ashmore Investment Management Ltd in London. "They want to become a reserve currency, and they will become a reserve currency."

Editor:Xiong Qu |Source: China Daily

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