Bond sales by China brokerages reach record $29.4B in one month

China’s securities firms flooded the debt market last month, unloading 209.4 billion yuan ($29.4 billion) in August, the largest monthly bond sale since Bloomberg started tracking back in 2004.

That was just the beginning. By mid-September, they pushed out another 129.9 billion yuan, nearly 170% more than what was issued during the same month last year.

The surge is happening while retail traders are borrowing more to chase profits in a $1.5 trillion stock rally. Firms are locking in funds while rates are cheap, and demand for margin loans is climbing fast.

Companies are using the bond proceeds to refinance maturing debt and fund capital-hungry businesses like margin lending.

Brokerages react to retail demand and cheaper financing

The spike in debt sales comes as more investors pour into stocks using borrowed money. Cao Haifeng, analyst at UBS Securities, said brokerages are “getting ready for potential business needs in the future so they have abundant liquidity for investors.” He expects China to ease derivatives trading rules, which will force firms to hold even more capital.

Since early August, the margin purchase balance has jumped more than 20%, hitting 2.38 trillion yuan this week. That beats the 2015 peak, the last time China’s stock market saw a strong bull run.

Meanwhile, the average coupon rate for these bonds in the third quarter dropped to 1.82%, the lowest on record.

A Bloomberg index of listed brokerages rose over 11% in August, but has cooled off a bit this month. Still, most analysts say the environment remains favorable.

Capital ratios at Chinese firms remain well above warning levels, and the sector’s leverage ratio is at 4x, much lower than the global average of 10x, giving them more space to borrow.

AI stocks, yuan gains, and cooling US tensions boost sentiment

This is all coming on the back of China’s tech sector in the stock market. The Hang Seng Tech Index climbed as much as 3.9% on Wednesday, reaching the highest level since November 2021. Baidu jumped 19%, leading the pack. Alibaba, JD.com, and SMIC also saw big gains.

Investors are betting on returns from major tech names. Goldman Sachs raised its target on Alibaba, pointing to improvements in its cloud unit. Arete Research upgraded Baidu to a buy rating based on its chip division, and JPMorgan just upgraded Contemporary Amperex Technology over its battery business.

Optimism is also returning in the internet space. Local media quoted JD.com’s chairman Richard Liu saying he isn’t looking to start a price war in the hotel sector. His comment sent JD.com’s shares up over 6%, and other names like Meituan and Trip.com followed.

Meanwhile, the yuan just showed strength for the first time in months. The offshore yuan, which trades more freely, appreciated past the central bank’s daily reference rate, something that hasn’t happened since July. It even traded stronger than the onshore version for most of the month, flipping the trend from August and July.

Traders are watching the 7.1-per-dollar level for signs of policy direction. A decision from the Federal Reserve, an upcoming call between Donald Trump and Xi Jinping, and a potential deal to keep TikTok running in the US are all on the radar.

The People’s Bank of China could use the October National Day holiday as a chance to let the yuan strengthen more, according to Australia & New Zealand Banking Group’s Khoon Goh.

“Now that we are getting convergence of the offshore yuan and the fixing, and with the dollar on the back foot, it seems a good time to resume the move stronger in the fixing,” said Khoon. He expects the yuan-dollar rate to drop to 7.05 by year-end, and even below 7 next year.

The offshore yuan rose 0.3% this week, hitting 7.1004 per dollar on Wednesday, while the central bank fix stood at 7.1013. At one point, the gap between the offshore and onshore yuan was the widest since late August.

The central bank has been using the daily fixing to guide the currency, which can only move 2% above or below that level. They’ve been nudging it higher lately, supported by strong exports, US-China trade talks, and rising local stocks. Some analysts say Beijing’s campaign against price wars might even help the country drag itself out of deflation.

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