(ATF) The sheen has come off China’s corporate and municipal bonds with the prospect of economy-sapping new lockdowns weighing on investors as coronavirus cases surge again.
The strongest start to a year on record came to a crashing end in the past five days, leading the benchmark ATF China Bond 50 Index to post its worst week since mid-December.
The gauge climbed 0.06% after three weeks of gains, each extending more than 0.10%.
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The measure, which calculates returns on a section of AAA-rated non-sovereign bonds, had climbed 0.60% in the period from Christmas amid a flurry of data showing the Chinese economy to be growing strongly from the pandemic downturn early last year.
Declines in the week were led by bonds on the Financials sub-index, which fell 0.02% over the five trading days. That was worsened by a 0.08% drop on Friday, the steepest slide since November 20. At that time, a slew of defaults among state-owned enterprises (SOEs) prompted investors to pull out of the market on concern the contagion would spread to other debt securities.
The bonds of China Zheshang Bank (CZB) and China CITIC Bank were the biggest losers. The yield on CZB’s 2.5% bond surged 1.79% while that on the 2.75% bond of China CITIC rose 0.62%.
Investors are concerned that new outbreaks of locally-transmitted coronavirus cases in China – months after the nation boasted of having all but rid itself of the scourge – will lead to more lockdowns.
The government’s shutdown of the economy to fend off the first wave of infections this time last year led to the only quarterly GDP contraction since the late 1970s. That contributed to the paring of total growth for the year to 2.3%.
With just industrial profits data due for release next week, bond investors are likely to remain guarded with their attention on health officials’ reactions to the new clusters of coronavirus.
The central bank’s response will also be closely watched; any threat to the economy may be met with a dose of sudden new stimulus. That may benefit bonds of local governments, who would be the most likely beneficiaries on the proceeds of any new debt sales. Developers and industrial issuers would also probably gain if new issues are aimed at building new infrastructure.