Chinese Bond Investors Flee for Safety Despite Beijing’s Financial Inclusion Drive

Investors in China’s bond market are sticking with safer forms of debt despite a broad push by Beijing to support private enterprise and small and medium-sized companies.

According to a report from Bloomberg the preference of Chinese investors for sovereign debt, local government debt and highly rated corporate debt has driven spreads to their widest point in nearly seven years.

In January the spread between five year AAA and AA- corporate notes hit their widest level since March 2012, revealing a strong reference for higher rated debt.

AA- bonds are considered junk in China, and oftentimes issued by the smaller private enterprises that Beijing hopes to better support with its financial inclusion drive.

China saw the sale of 482 billion yuan in bonds with ratings of AA+ or above in January, for the second largest monthly issuance after March 2016.

The sale of debt rated at AA remained unchanged compared to December, however, and was under half of the highest level on record.

Bloomberg data further indicates that commercial banks, who are China’s biggest investors in the bond market, increased their holdings of sovereign bonds, policy bank notes and lenders’ short-term debt at the most rapid rate in two years in December.

Commercial banks have also increased their holdings of debt from the government and lenders at a more rapid rate than corporate notes for four consecutive months.

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