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China railmaker issues debt for project investment, loan refinancing

Government’s decision to expand rail spend this year decreases credit risk for investors

Gulf News

Hong Kong: China Railway Construction Corp. sold its biggest bond in three years as the government increases investment in the rail network 12 months after a fatal crash halted projects.

The constructor of a high-speed link that halved travel time between Beijing and Shanghai to five hours issued 10 billion yuan (Dh5.88 billion) of one-year notes at 3.6 per cent, it said in a filing yesterday. The average yield on similar-maturity notes of the Ministry of Railways, which manages the country’s rail network, fell 145 basis points this year to 3.44 per cent. Globally, industrial company debt yields 2.3 per cent, according to Bank of America Merrill Lynch indexes.

The government said earlier this month it may expand rail spending to about 300 billion yuan this half, after overhauling industry management following a crash that killed 40 people near the eastern city of Wenzhou last July. Premier Wen Jiabao has called for more investment to sustain an economy that has slowed for six consecutive quarters.

“The reinforced support from the central government means that investors can drop any concern over credit risks for the rail sector,” Sam Qin, a bond analyst at Shenzhen-based China Investment Securities Co., which is owned by a government investment arm, said. “Issuing bonds is the best option for the company to add working capital, thanks to the low borrowing costs, as it gears up for more projects in the second half of this year.”

Reviving projects

The offering by China Railway Construction, the country’s biggest railmaker by market capitalisation, was its largest since it sold 10 billion yuan of 3.4 per cent three-year securities in 2009, according to data compiled by Bloomberg.

The sale lowers the company’s financing costs, and the proceeds will be used for project investment and to refinance some loans, Wonderful Sky Financial Group Holdings Ltd., which handles media relations for the company, said in an emailed reply to questions yesterday. The 3.6 per cent yield compares with the 6 per cent benchmark rate for a 12-month bank loan.

The Beijing-based rail builder has issued 12.88 billion yuan of debt this year, 13 times more than the 950 million yuan of sales in the same period last year, according to data compiled by Bloomberg.

Spending plans

The increase marks a shift after the government punished 54 officials and ordered the railway ministry to improve management. In the accident on July 23 last year, a train was partly pushed off a viaduct by another locomotive.

Railway contractors are gearing up for more spending as projects resume after suspensions last year, according to Wang Mengshu, deputy chief engineer with China Railway Engineering Corp. The company is the state-owned parent of China Railway Group Ltd., the country’s second-biggest listed rail builder.

“This year’s rail infrastructure investment will be mainly used for resumed projects after a batch of them were halted or delayed last year,” Beijing-based Wang said by phone yesterday. “Construction of projects has accelerated.”

Chinese authorities will spend 448.3 billion yuan on railways this year, according to a statement dated July 6 on the website of the National Development and Reform Commission’s Anhui branch. That would mean a 9 per cent increase from a previous plan of 411.3 billion yuan.

Stimulus steps

The steps are part of the government’s efforts to prevent further economic cooling, according to Lin-Yang Chung, a Shanghai-based analyst with MasterLink Securities (H.K.) Corp. “Expansion of railway construction projects this half will help improve China Railway Construction’s revenue,” Chung said by phone yesterday.

Market measures highlight how debt investors have welcomed the government backing. The premium they demand to hold the Railway Ministry’s one-year bonds over similar-maturity government notes fell to 85.9 basis points last month, the lowest since February 2011, according to Bloomberg-compiled data.

The yield on the government’s 10-year bonds fell to a 22-month low at 3.24 per cent on July 11, down 32 basis points from this year’s high of 3.56 in March.

Credit-default swaps insuring Chinese government debt against non-payment for five years rose 0.4 basis point to 115.1 on July 18, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities should the issuer fail to adhere to debt agreements.

Slowing economy

The yuan weakened 0.05 per cent to close at 6.3734 per dollar in the onshore market yesterday, according to the China Foreign Exchange Trade System.

Growth in China’s gross domestic product slowed to 7.6 per cent last quarter from 8.1 per cent in the previous three months. Industrial production increased at a slower pace in June while retail sales growth decelerated.

The government will continue to implement a more “proactive” labour policy, Wen said on July 17 at a government meeting on employment, according to a statement posted on the central government’s website.

While stimulus helps the rail industry resume suspended projects, the slowing economy means “the sector may still have to face the problem of lack of capital for new projects,” MasterLink Securities’s Chung said.

Spending is typically larger in the second half of the year than the first, and the significance of the reported increase shouldn’t be overstated, according to Yao Wei, a Hong Kong-based economist for Societe Generale SA.

Adding rails

China will add more than 6,000 kilometres of railroads this year, according to China Railway Engineering’s Wang.

High-speed links between Beijing and Guangzhou and the capital city and the Harbin are now scheduled to be completed this year from an original target of last year, reports by the official People’s Daily indicate.

In 2009, spending of 600.6 billion yuan on railway infrastructure was part of stimulus that spanned low-cost housing, roads and earthquake reconstruction work.

“In terms of rail-construction spending for projects that had been approved earlier, China’s stimulus may be as strong as that in 2009,” Karen Li, an analyst at JPMorgan Chase & Co, said. “The government wants to boost economic growth.”