When it comes to yield, China’s publicly traded companies stand out compared to government bonds

Zhang Shidong

Chinese stocks are now most appealing relative to government bonds on record even as equities remain generally subdued amid the coronavirus outbreak.

The difference between the yield on the nation’s 10-year sovereign bonds and the dividend yield on the biggest publicly traded companies narrowed to 0.27 percentage point late last month, the least since Bloomberg began to compile the data in 2005.

The previous record for the spread was 0.5 percentage point, a level that was touched three times in the past. Stocks surged subsequently on all three occasions.

While traders have been flocking to government bonds in the hunt for safe assets amid the coronavirus outbreak, driving yields down to record lows both in China and globally, the dividend yield, the ratio between dividend payouts and share prices, on the CSI 300 Index of the biggest mainland-traded stocks rose to its highest level in 14 months.

Shenwan Hongyuan Group, a Shanghai-based brokerage, remains cautious on China’s bonds for the second half, predicting the bull run will probably end in the second quarter. Citic Securities, the nation’s biggest publicly traded brokerage, and Essence Securities are bullish on stocks, saying economic expansion will pick up following a slew of measures by the government to bolster growth.

“The absolute level of the bond yield is pretty low currently and likely to see more volatility,” said Meng Xiangjuan, an analyst at Shenwan Hongyuan. “Investors should gradually pull out of bonds in the second quarter rather than buy aggressively.”

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Meng predicted that 2020 could be the year when bonds cross over from a bull market into bear territory.

The yield on 10-year government bonds stood at 2.54 per cent on Friday after sliding to an all-time low of 2.48 per cent this week. The companies on the CSI 300 have an average dividend yield of 2.2 per cent. The yield on 10-year US treasuries was 0.72 per cent on Thursday.

The convergence of the yield spread between the two asset classes in China is an auspicious sign for stocks, if history is any guide. When the difference narrowed to 0.5 percentage point in 2006, the CSI 300 surged almost sixfold in the following two years. The index rose 36 per cent in the next 16 months, when the spread dipped to that level again in 2016. When it happened for a third time in January 2019, the benchmark surged 37 per cent within four months.

China’s stocks will start to rise in the second quarter, when growth is set to gather pace after a raft of stimulus measures unveiled by Beijing and the Covid-19 pandemic in the US and Europe peaks, according to Citic Securities.

“The inflection point of China’s economy will be confirmed in the second quarter under the government policy support,” said Qin Peijing, an analyst at the brokerage. “Growth will hopefully go back to a reasonable range within a year.”

The CSI 300 has risen 6.8 per cent from a low in March after Beijing said it would widen the fiscal deficit to battle the fallout of Covid-19, and the central bank cut the interest rate it charges commercial lenders on the money market and the reserve requirement ratio.

China’s “A-share market will extend its rebound, as the valuations are near a historical low and there are signs that monetary policy support will accelerate,” said Chen Guo, an analyst at Essence Securities.

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