China Uses Record Corporate Bond Sales As Secret Sauce for 7.5% Growth

07/02/2014 5:15 pm EST


Jim Jubak

Founder and Editor,

The Chinese government's "stealth" stimulus campaign to support economic growth is paying off and MoneyShow's Jim Jubak thinks Asian stocks are cheap.

"Look at what they do, not at what they say," is good advice for investors.

But it's not always easy when it comes to China. Especially when the government seems intent on keeping its intentions vague.

Premier Li Keqiang has promised to reduce the availability of cheap credit and to rein in lending by banks and in the country's shadow banking sector.

But record corporate bond sales last quarter, and bond sales in China, have to be approved by central government regulators, who argue that any restrictions on bank credit are being more than balanced by increases in cash flow from corporate bond issuance.

Bond issuance grew by 54% in the first quarter of 2014 from the fourth quarter of 2013 to 1.55 trillion yuan ($250 billion). At the same time, yields on two-year AAA-rated corporate notes dropped 1.37 percentage points to a 10-month low.

This volume of bond sales has pushed up debt levels at Chinese companies, despite the Premier's talk of reforms that would wean companies from using cheap money to support money-losing units. Statistics put together by Bloomberg show that debt levels at 4,000 publicly traded non-financial Chinese companies has climbed to $2.05 trillion from $1.8 trillion at the end of 2012.

This expansion of corporate debt and a big increase in the issuance of corporate bonds makes sense in the context of the government's "stealth" stimulus campaign to support economic growth in China. While talking about the need for monetary restraint, the government has taken steps in increase the speed with which budgeted funds get spent, to loosen reserve requirements for many of China's smaller and more rural banks, and to allow local governments to back off on mortgage lending restrictions.

All that—if we can judge from yesterday's Purchasing Managers Index that showed manufacturing in China grew in June at the fastest pace this year—may actually be working to prevent China's growth rate from slipping too far below the government's 7.5% target.

That story has certainly lit a fire under Asian shares. The MSCI Asia Pacific Index ex-Japan is now at a three year high on signs of expansion in the Chinese, Japanese, and US economies. The index is still cheap at 13.5 times estimated 2014 earnings versus 16.7 for the Standard & Poor's 500 and 15.6 for the Stoxx Europe 600 index, according to Bloomberg.

That suggests that this rally could have longer to run.

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