Strategic Trade / Buy
Fixed Income Specialist
Summary: Pick up some extra yield over Chinese Government Bonds without adding risk via the Export-Import Bank of China.
Instrument: Export-Import Bank of China CNY bonds (CND10001PY09)
Price Target: n/a
Market Price: n/a
We prefer Chexim to the China Development Bank because its operations are more selective and focused. The past few years have seen the CDB issue a large number of loans to Chinese municipalities, causing its total assets (mainly loans) to soar to more than 15% of China’s GDP.
Now that China is welcoming foreign investment, we can expect these development banks to be under more scrutiny, and for investors to select the one with the heathiest balance sheet.
We believe that the Export-Import Bank of China's senior unsecured notes (3.74% fixed coupon, maturity September 2021) offer an attractive yield of approximately 3.1%. This means that this bond provides an approximatively 50 basis point pick-up over Chinese sovereigns of the same maturity with no additional risk.
In addition, last year saw a change to the taxation rules for Chinese onshore bonds, which now permit a three-year exemption on foreign institutional investors’ withholding tax on interest coming from Chinese onshore investments.
(On this last point, it must be said that insufficient details have been released regarding tax clawbacks on previous investments or tax on investment after the exemption period, thus it would be prudent to check this information with a tax advisor.)
Time Horizon: n/a