Chinese investors ignore government and flock to safer bonds

Spreads in China’s $12 trillion onshore bond market are the widest in almost seven years, the latest Bloomberg data analysis shows, as appetite for high-quality Chinese debt picks up despite the government’s pledged support for riskier bonds.

Chinese companies issued Rmb 482 billion ($71 billion) of bonds at or above AA+ grade – the cut-off point for ‘junk’ status – in January, marking the second-largest monthly volume ever. Demand for lower-grade bonds, meanwhile, was less than half of this.

The spread between five-year AAA and AA- corporate bonds stretched to the widest since March 2012 last month, highlighting the growing fear of defaults and desire for safe havens.

The government has been trying hard to improve financing conditions for smaller, private companies whose access to credit has traditionally been weak, and was made worse by a recent deleveraging campaign.

Despite repeated reserve rate cuts for banks and efforts to direct lending to the private sector, investors are still lacking the confidence to take on junk bonds. Commercial banks, China’s largest fixed-income investors, have spent more on government-backed debt than corporate notes for four consecutive months.