Chinese investors used more borrowed money last month to buy bonds amid a note market rebound, as authorities try to balance efforts to revive economic growth with steps to staunch excessive leverage.
The outstanding amount of repurchase agreements in China’s interbank market, used by bond traders to amplify their buying power, jumped 17 percent in May to 7.8 trillion yuan ($1.2 trillion) from April. In that month it had dropped to 6.7 trillion yuan, the lowest since August. Last month’s increase was the sharpest since December, when the measure hit a record high of 9.7 trillion yuan.
While a jump in leveraged wagers indicates rebounding confidence in the debt market after panic selling in April, any sustained increases would raise concerns about financial stability. China Securities Depository and Clearing Corp. surveyed some brokerages on the use of borrowed money in the exchange-traded bond market, people familiar with the matter said in December. Domestic shares lost more than $5 trillion of value last summer after regulatory curbs helped cut outstanding margin debt in half.
“Some bond investors added leverage in May to levels prior to April because they expect the government to ensure good market liquidity given the poor economic data recently,” said Wang Ming, chief operating officer at Shanghai Yaozhi Asset Management LLP, which oversees 15 billion yuan of fixed-income securities. “Investors probably will not have the courage to lever up further given the government crackdown.”
As stability returned to China’s bond market in May, the yield premium on five-year AAA rated domestic notes over sovereign securities plunged 19 basis points, the most in five months. The spread had widened 18 basis points in April as investors werespooked by the bond trading halt for state-owned China Railway Materials Co.