CHINA drew strong demand at its first sale of 50-year bonds in five months as investors said an aging population will bolster the market for longer-dated bonds.
The finance ministry auctioned 28 billion yuan (US$4.4 billion) of debt due in November 2061 at a yield of 4.33 percent, according to a trader at a finance company. That is down from 4.48 percent at the previous sale of the maturity on May 25. The sale drew bids of 1.52 times the amount offered, up from 1.38.
The number of Chinese aged 60 or more, who tend to focus on preserving wealth for retirement instead of speculating, will jump to 221 million by 2015, representing 16 percent of the population, from 2011's 178 million, according to a State Council report.
China's 2041 bond yield fell 25 basis points this quarter to 4.19 percent, while the rate for US 30-year debt rose 18 basis points to 3.09 percent. Thailand sold 50-year debt in September at 4.52 percent.
"More and more Chinese will buy pension products as the elderly population expands," said Shi Lei, a Beijing-based analyst at Ping An Securities, a unit of the nation's second-largest insurance company. "Insurance companies will have more money to buy longer-term bonds."
Rates are still "quite attractive" and yields on 10-year bonds, which have fallen 22 basis points this year, may drop another 20 basis points before year-end as inflation slows, Shi said.
A government report Wednesday showed consumer prices increased 5.5 percent in October, the least since May. Government bonds are heading for a 3.7 percent gain this year, after a 1.4 percent return in 2010, according to an HSBC index. The country's benchmark stock index has slumped 13 percent since the start of last year.
Slumping yields
The yield on China's 3.93 percent government bonds due in August 2021 fell three basis points to 3.67 percent Wednesday. It has dropped 19 basis points, or 0.19 percentage point, this quarter.
Yields in Japan, the US and Europe have slumped the past two decades as the swelling ranks of retirees favored fixed- income assets. The yield on Japan's 10-year debt plunged to 0.98 percent, from 6.6 percent at the end of 1990, and US bonds have suffered a drop in 30-year rates from 8.25 percent to 3.08 percent.
China's working-age population will peak in 2015 and labor shortages will become more common, posing new difficulties for policymakers, the Asian Development Bank said in a September report. The government should improve a weak social safety net that forces most elderly to depend on family support, it said.
China will have 440 million people aged over 60 by 2050, accounting for 31.4 percent of the population, compared with a world average of 21.9 percent, the bank said, citing estimates from the United Nations.
Liu Li-Gang, chief economist for China at ANZ Banking Group in Hong Kong, said: "Pension funds will become bigger, which probably requires longer investment in fixed-income assets. The demand is always there. Bonds tend to offer better yields than bank deposits so that provides an incentive for people to hoard more bonds."
The aging population is particularly challenging for China as the nation's real income level of around US$4,000 per capita is far from the US$16,200 in South Korea and the US$14,900 in Japan, while those countries have the same percentage of elderly people, the ADB said.
Significant challenge
China's management of its aging population as the number of citizens declines "will decide its future credit ratings," David Beers, global head of sovereign and international public finance ratings at credit rating agency Standard & Poor's, said in August.
Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing, said: "The changing demographic picture will pose a significant challenge" to the economy, as a three-decade one-child policy shrinks the workforce and weakens the engine of growth. "The problem is you can change the one-child policy today and have more people born, but they are not going to enter the workforce for another 20 years," he said.
Fifty-nine percent of global investors in a Bloomberg poll published in September predicted economic growth in China will ease to less than 5 percent by 2016. Growth moderated to 9.1 percent in the third quarter, the slowest in two years, after the central bank limited lending to fight inflation and the European debt crisis eroded demand for exports.
The one-year swap rate fell five basis points yesterday to 3.12 percent, below a 3.5 percent benchmark savings rate and the lowest since March. The yuan rose 0.12 percent to 6.3383 per dollar.
Falling costs for commodities, such as iron ore, and an improved supply of pork have helped to restrain price gains, though the government remains set to miss its full-year target of 4 percent inflation.
The cost of insuring Chinese sovereign bonds against non-payment using five-year credit default swaps is now 135 basis points in New York, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.