Swaps Show Hu Jintao Bonds Approaching Treasuries: China Credit
By Shelley Smith
Oct. 11 (Bloomberg) -- At a time when governments around the world are facing growing debt, China’s bonds are becoming almost as safe as U.S. Treasuries in the market for insuring against defaults.
Five-year credit-default swaps contracts on the nation’s bonds fell 29 percent in the past month, the biggest drop among more than 80 nations, and ended last week at 56 basis points, according to data compiled by CMA and Bloomberg. Default swaps for the U.S. were little changed at 46.
China’s bonds have become cheaper to insure than those of the U.K. and France since August as the fastest-growing economy surpassed Japan to become the world’s second-largest. Moody’s Investors Service said last week it may raise China’s debt rating from A1, five levels below the top Aaa grade.
“Right now the strongest balance sheet in the world is China’s,” Daniel Arbess, who runs the $2.1 billion Xerion fund for Perella Weinberg Partners in New York, said in an interview with Bloomberg Television on Oct. 7. “China can use that balance sheet strength and the political centralized control that it has over its economic policy to literally finance and drive the ongoing urbanization and industrialization of its economy.”
The 10 basis-point difference between contracts on China and the U.S. is the narrowest since at least January 2008, according to data from New York-based CMA, which provides data on the market that suggests both countries should have the second-highest debt rankings. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually in a contract protecting $10 million of debt.
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