Yuan Debt Worst in BRICs as Inflation Boosts Rate-Rise Bets: China Credit

Yuan-denominated bonds are the only local-currency debt among the biggest emerging nations delivering a loss as investors bet quickening inflation will force China to keep raising interest rates.

The securities have lost 0.6 percent in dollar terms this quarter, while Brazilian real bonds returned 2.6 percent, Russian ruble notes 0.5 percent and debt denominated in Indian rupees 0.8 percent, according to JPMorgan Chase & Co. indexes. Yuan notes lost 0.3 percent in August, the worst decline after a 1.5 percent slide for ruble debt among the so-called BRIC nations. Local-currency debt in Asian emerging markets is up 0.3 percent this month.

Yuan bonds are declining as three interest-rate increases this year in the world’s fastest-growing economy fail to slow inflation that climbed to a three-year high in June, according to the latest available data. Brazil’s consumer price growth is slowing after policy makers raised borrowing costs five times in 2011 while Russia’s eased after two increases. India’s central bank has lifted benchmark rates 11 times since March 2010.

“Other BRIC nations, such as Brazil and India, have been raising rates aggressively,” Michael Roche, an emerging-markets strategist in New York at MF Global Inc., said by phone yesterday. “Higher degrees of policy action to combat inflation are being seen in” those countries compared with in China, he said.
Interest-Rate Swaps

Investors have boosted bets on rising Chinese interest rates by the most among the BRIC countries in the past two months, with the cost to lock in borrowing costs for a year gaining 46 basis points, or 0.46percentage point, since June 6, according to interest-rate swaps tracked by Bloomberg. Swaps for Brazil dropped 13 basis points in the same period, while Russia’s advanced four and Indian swaps rose 24, the data show.

Russian price growth slowed to 9.4 percent in June, the least this year, and weekly inflation decelerated in the week to Aug. 1 for the first time since August 2009. Brazilian monthly inflation slowed more than economists forecast in the month ending mid-July, with consumer prices rising 0.1 percent, the slowest pace in 11 months. India’s wholesale-price index climbed 9.44 percent in June from a year earlier, prompting the Reserve Bank of India to boost the repurchase rate by 50 basis points on July 26.

Chinese inflation was 6.4 percent in June, the most since it hit 7.1 percent in June 2008, as food prices jumped. Consumer-price growth held at 6.4 percent in July, according to the median estimate of 24 analysts surveyed by Bloomberg before official data due on Aug. 9.
No Relaxation

It’s too early to consider relaxing monetary policy, the People’s Bank of China said in a statement on Aug. 1.

“Domestic inflation expectations remain strong and the foundation for stabilizing prices is not solid,” the central bank said. “Prices could rebound.”

Chinese policy makers may raise benchmark rates again around Aug. 10, the state Xinhua News Agency said in a report published on Aug. 2, citing Li Pumin, deputy secretary general of the nation’s top planning agency. China last raised its key deposit and lending rates by 25 basis points on July 6, bringing the total this year to 75 basis points of increases.

Yields on Chinese local-currency bonds are lower than those for Brazil, Russia and India because the nation poses less risk than the other BRIC economies, said Nick Bennenbroek, head of currency strategy in New York at Wells Fargo & Co.

China’s local-currency debt is rated Aa3 by Moody’s Investors Service, the fourth-highest investment grade. Brazil is ranked Baa2, the second-lowest investment-grade rating and one step behind Russia at Baa1. India is at Ba1, the highest junk rating.
‘Lower Risk’

“Holders of these bonds may accept a lower rate of return because of the lower risk in China” with its low level of debt, strong economic growth and a centrally controlled government and economy, Bennenbroek said by phone yesterday. “The currency is also a lot more stable than the real or the ruble so people accept lower returns because they’re not going to see huge swings or losses in the renminbi,” he said, referring to the yuan by its Chinese name.

The yuan is posting the smallest swings of the BRIC currencies, with its three-month volatility rate at 1.33 percent yesterday, compared with 10 percent for the real, 8.5 percent on the ruble and the rupee’s 4.5 percent, data compiled by Bloomberg show.

The yuan weakened 0.08 percent to 6.4439 per dollar as of 11:55 a.m. in Shanghai, retreating from a 17-year high of 6.4330 reached on Aug. 3, according to the China Foreign Exchange Trade System. It’s strengthened 2.3 percent this year.
Lagging Behind

The Chinese currency’s advance is lagging behind a 8.2 percent jump in the ruble and the real’s 4.5 percent gain in 2011. The rupee has weakened 0.2 percent year-to-date, according to data compiled by Bloomberg.

Chinese 10-year government bonds yield 4.11 percent, up 22 basis points from the end of April, according to data compiled by Bloomberg. The rate on similar-maturity U.S. Treasuries has dropped 90 basis points to 2.39 percent.

China’s seven-day repurchase rate, a measure of the availability of interbank funding, averaged 5.26 percent in July and 5.90 percent in June, the highest levels in Bloomberg data going back to January 2004. The rate fell 26 basis points today to a 12-week low of 3.00 percent, according to a daily fixing published by the National Interbank Funding Center. It’s dropped 2.15 percentage points this week as concern the global economy is headed for a recession caused stocks to tumble worldwide.

Five-year contracts protecting Chinese government debt against default rose four basis points to 96 basis points yesterday, the highest level since May 2010, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Deposit Rate

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or company fails to adhere to its debt agreements. A basis point equals $1,000 annually in a contract protecting $10 million of debt.

Two-year contracts to exchange the Chinese central bank’s one-year deposit rate for a fixed payment were at 3.6553 percent, the highest they have been since October 2008, according to data compiled by Bloomberg. The swaps imply the deposit rate will be increased by 31 basis points in the next 12 months to 3.81 percent.

China’s five-year yuan bonds yielded 3.91 percent yesterday, up 48 basis points in the past two months and one basis point off the highest level this year reached on Aug. 3, Bloomberg data showed.

The increase compares with a 30 basis-point decline in similar-maturity government ruble bonds to 7.18 percent, and a three basis-point increase to 12.58 percent on real debt due in 2017, according to data compiled by Bloomberg. The yield on five-year rupee notes has climbed two basis points in the past two months to 8.386 percent.

“Fears of tightening and inflation are probably weighing on bonds,” Win Thin, the global head of emerging-markets strategy in New York at Brown Brothers Harriman & Co., said by e-mail yesterday.