Rate Increase Sends Message
12/11/2013 12:01 am EST
Increase in China's bond yields reflects an important change in China's policy, says MoneyShow's Jim Jubak, that should have a further impact on some Chinese companies.
Yields on AAA-rated five-year maturity Chinese corporate bonds have risen to 6.25%. The thing that is interesting here is that is about a 1.75 percentage point jump in the last six months. It is a sign that China's government is really serious about developing a bond market. Most financing of Chinese companies has historically come through banks. The bond market has been relatively small. The way to grow it is to increase yields. The Chinese government is serious about its efforts to give the market a bigger say in how interest rates are set, as opposed to having them set by state regulators, and it is really important because the biggest financial companies, some of the biggest financial companies in China, the big Chinese insurance companies, have been really, really hurt by a requirement, a regulatory requirement, that they put a lot of their money into fixed income assets and, by the low, return on those assets.
If you are going to put money into fixed income assets and you are going to put a lot of money there, a jump of 1.75 percentage points is really huge. What we have seen, in the last month or so, is that shares or ADRs of companies like China Life, which trades in New York under (LFC) is the ADR symbol, has gone up about 24% in the last month, as these reforms look like they are making their way through the financial markets, as these higher rates look like they are making their way through the financial markets.
A company like Ping An, which is number two, trades (HK:2318) Hong Kong, or (PNGAY) in New York, it is only up about 30% over the last 12 months, but it is starting to get momentum. I think that, given what is happening to yields and interest rates in China, putting some money into Chinese insurance companies is a good way to play this financial reform. It is a good short-term trade. China Life is incredibly liquid in New York so you can get in and out relatively easily, and that is one of the reasons I would prefer China Life, which is not growing as fast, it is not as well run, as an insurance company, as Ping An, but I think in the short-term, it is probably a better trade.
This is Jim Jubak for the MoneyShow.com video network.