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Bond sell-off in China extends to high-quality Tencent, banks

(Bloomberg) — China’s higher-quality dollar bonds are suffering their worst sell-off in about seven months as real estate troubles spread to the broader credit market.

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Spreads on the investment-grade notes — which make up the bulk of Chinese issuers’ offshore dollar securities — widened by about 8 to 10 basis points on Tuesday, traders said. That would be the largest daily growth since April, according to a Bloomberg index, after rising 7 basis points Monday.

The sell-off has gone well beyond the higher quality real estate names in China. The spreads on dollar bonds of Tencent Holdings Ltd. broadened by 12 basis points to 137 basis points on Tuesday, the biggest jump since July. Financial issuers are also collapsing, with the yield premium on a Bank of Communication Hong Kong note increasing by about 10 basis points.

There are signs of debt crisis contagion in China’s real estate sector, which struggles to combat excessive debt and liquidity problems at real estate giant China Evergrande Group. Until recently, the impact was largely confined to junk-rated developers. But investors have since become increasingly concerned about the impact on larger real estate companies and the wider economy.

“We believe that some form of government policy easing or intervention is ultimately inevitable, at which point Chinese dollar bonds should recover strongly,” said Mark Reade, head of fixed income desk research at Mizuho Securities Asia. “But until then, the path of least resistance for Chinese credit spreads is wider.”

Authorities have tried to mitigate the fallout, with the central bank injecting liquidity into the financial system. That has largely succeeded in keeping the onshore credit market calm. But the contagion of investment-grade offshore securities is worrisome as they make up nearly 70% of the $870 billion market for all Chinese dollar bills.

The moves have pushed average bond yield premiums to a burst of about 27 basis points over four consecutive days, their sharpest spike since April when concerns over China Huarong Asset Management Co. shook the market.

Spreads are already at their widest against the respective Treasury bills in at least five months, the Bloomberg index shows. Real estate makes up 10% of the index, the second largest weighting after financial services companies.

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