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Investors Dump Chinese Policy Bank Bonds

  • The Russian invasion of Ukraine and Beijing’s reticence to condemn the unprovoked military action is now forcing global investors to take a closer look at the Chinese banks that they’ve been funding, especially those with exposure to Russian borrowers.
  • There has been growing concern that China’s heavily leveraged banks are in bad shape with some estimates putting Chinese banks at 350% indebtedness, compared with U.S. banks at 100%.

For years, a favored trade of global investors was to gorge on bonds issued by Chinese state-owned lenders otherwise known as “policy banks” which funded Beijing’s ambitious public works projects, paying for everything from dams to motorways, airports to seaports, both at home and abroad.

But the Russian invasion of Ukraine and Beijing’s reticence to condemn the unprovoked military action is now forcing global investors to take a closer look at the Chinese banks that they’ve been funding, especially those with exposure to Russian borrowers.

With Washington and its allies imposing harsh sanctions on Russia, there are growing concerns that countries or institutions which continue to fund Moscow’s ability to wage war will eventually be caught in the crosshairs of western sanctions.

Two of three Chinese policy banks, China Development Bank (CDB) and the Export-Import Bank of China (Exim Bank), are known to have extended credit lines worth billions of dollars to Russian borrowers using those monies to fund everything from infrastructure to energy.

In February, international investors liquidated US$27 billion in yuan-denominated Chinese policy bank bonds, roughly a sixth of accumulated holdings of such debt.

According to data from China Central Depository & Clearing, the pace of the selloff has increased greatly since May, when western allies imposed a fresh round of sanctions on Moscow.

A 2017 U.S. law that gives the U.S. government the right to penalize foreign entities that trade with sanctioned firms, countries, and people has provided plenty of food for thought for global investors who want to keep doing business with America and forcing a rethink of even some of the most lucrative investments that have tangential links to Russia.

Although not the target of sanctions themselves, these “secondary sanctions” could jeopardize already embattled Chinese banks and potentially stymie their ability to raise fresh capital in global bond markets.

Between 2000 and 2017, CDB and Exim Bank extended loans north of US$73 billion to Russian state-owned businesses and financial institutions, according to AidData’s statistics which follows China’s international lending activities.

And recently, further loans extended to a Russian borrower by CDB and Exim Bank amounting to US$2.54 billion are said to have been issued.

But it’s entirely possible that the “Russian connection” could be nothing more than a convenient excuse for global investors to drop Chinese policy bank bonds.

There has been growing concern that China’s heavily leveraged banks are in bad shape with some estimates putting Chinese banks at 350% indebtedness, compared with U.S. banks at 100%.

Reports of regional and state-owned banks freezing deposits in parts of China, leading to mass protests outside bank branches, have surfaced in recent weeks and managers may simply be looking to de-risk their portfolios in a time of heightened economic uncertainty.  

Soaring U.S. Treasury yields are also a possible reason why investors are looking to exit China – the benchmark 10-year U.S. Treasury yields close to 3% at the moment, while CDB bonds yield 2.83% and Chinese sovereign debt, 3.08%.

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