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Credit default swaps (CDS) on five-year bonds rose by 33 basis points to 133bps, according to financial data firm Markit
The cost of insuring against a default on Chinese sovereign debt soared on Thursday as China's central bank worsened a credit squeeze by refusing to inject cash into the financial system.
Credit default swaps (CDS) on five-year bonds rose by 33 basis points to 133bps, according to financial data firm Markit, as Chinese officials signalled a determination to rein in risky lending practices.
The People's Bank of China increased the pressure on lenders this week by removing Rmb2bn (£211m) from the market amid mounting concerns over the sustainability of a credit boom driven by the Chinese shadow banking system. The announcement had an immediate impact: short-term interest rates spiked and the sale of 10-year government bonds hit its lowest level since last year. Interbank borrowing costs hit their highest level in six years, while the Hang Seng index in Hong Kong and the Shanghai SE Composite Index both dropped by nearly 3%.
Markit's director of credit research, Gavan Nolan, said the CDS widening was a "huge move". He said: "Only at the peak of the financial crisis have we seen moves of this size." The CDS jump means that the cost of insuring against a default on $10m of Chinese sovereign debt has climbed overnight from $100,000 to $133,000.
The news came amid further bleak economic indicators for the world's second largest economy. The country's manufacturing activity hit a nine-month low in June, down from 49.2 to 48.3, according to HSBC's flash purchasing managers' index, with a reading below 50 indicating contraction. Last year, China's economy slowed to its lowest rate in 13 years, mainly due to a drop in demand for exports from the US and Europe. Analysts say that China may narrowly miss its projected GDP growth target of 7.5% this year, as the country continues its transition from an export-led economy to one based on consumption.
"Nobody is entirely clear why the People's Bank of China is not coming in with liquidity," said Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets. "I see that it's a warning to the banks and the financial sector as a whole that they're trying to clamp down on misuse of capital."
On Wednesday, China's central government urged banks to contain financial risks and do more to support economic reforms. Analysts say that the message, delivered after a meeting led by premier Li Keqiang, imply that the country's credit shortage may last for at least another month.
"After Li's statement yesterday, the market now sees the crunch lasting longer. Until after mid-July, liquidity won't get better significantly," Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group, told Bloomberg.
Zhang Zhiwei, economist at Nomura International in Hong Kong, told AFP: "We believe the government is committed to tolerating short-term pain to achieve its policy objectives - containing financial risks and secure sustainable growth in the long term."
