CHINESE companies' dollar debt is handing investors the biggest losses in almost three years as concern bad loans will climb cools appetite for the securities amid signs the global recovery is losing steam.

The notes fell 1.5 percent in August, the most since global credit markets seized up in October 2008 following the collapse of Lehman Brothers Holdings Inc, according to HSBC Holdings Plc's Asian US Dollar Bond Index. Only India's debt performed worse among issuers from Asia's 10 biggest economies excluding Japan and Taiwan. Bonds sold by firms in Singapore, the only regional economy to be rated AAA by the three largest ratings companies, gained 1.3 percent, while United States Treasuries rose 2.8 percent.

Chinese firms have sold a record US$33 billion of dollar-denominated bonds this year as the yuan strengthened 3.4 percent versus the greenback and domestic interest rates were raised three times. The cost to protect China's sovereign debt against default jumped the most in two years in August amid fears the banking system will need to be bailed out as loans to local governments turn sour.

"There is growing concern about the financial standing of Chinese corporations amid a tight credit environment," said Takahide Irimura, head of emerging-market research in Tokyo at Kokusai Asset Management Co, which manages about US$60 billion of assets. "Also, investors are generally becoming more risk averse."

Dollar-denominated bonds issued by Evergrande Real Estate Group Ltd, China's second-biggest developer by sales, dropped in August by the most in data going back to June 2010. The yield on the 13 percent notes due January 2015 climbed 317 basis points, or 3.17 percentage points, to 14.92 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

China National Offshore Oil Corporation's 4.25 percent bonds due January 2021 rose last month, pushing their yield down 35 basis points to 3.85 percent. The Industrial and Commercial Bank of China's 5.125 percent debt due November 2020 fell, with the yield on the securities climbing 10 basis points to 5.17 percent.

CNOOC, China's largest offshore oil explorer, is rated Aa3 by Moody's Investors Service, the fourth-highest of 10 investment grades. ICBC, the world's biggest lender by market value, is rated three steps lower at A3, while Evergrande's B2 rating is five levels below investment grade.

The average yield Chinese companies pay to borrow in dollars reached a 14-month high of 5.69 percent on August 25, 35 basis points more than it was at the start of last month, an HSBC index shows. The rate has since declined to 5.44 percent as better-than-expected US manufacturing and consumer spending data damped concern the world's biggest economy is headed for a recession. The securities, which tumbled 12 percent in October 2008, added 0.1 percent since the end of August.

Credit default swaps

Five-year credit default swaps for China's debt surged 21 basis points to 108 basis points last month, the biggest increase since August 2009, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. They touched 123 basis points on August 26, the highest level since May 2009, and were up seven basis points to 115 on September 2 in New York.

Contracts for Brazil and Russia were 143 basis points and 187, at the end of last month. A basis point equals US$1,000 annually in a contract protecting US$10 million of debt. The derivatives are used to insure debt against non-payment and traders use them to speculate on credit quality.

Fitch Ratings lowered its outlook on China's sovereign AA- local-currency rating to "negative" from "stable" on April 12 because of the risk banks will need to be rescued. Insufficient data about the debt of China's local governments is a "weakness," Andrew Colquhoun, Asia-Pacific head of sovereign ratings at Fitch, said last week in Beijing.

Policy makers have told lenders to set aside more cash to address concern that the US$1.7 trillion in liabilities accrued by regional administrations building roads and other infrastructure will trigger the nation's third banking bailout in less than two decades. Chinese banks' non-performing loan ratio fell to 1 percent in the second quarter, from as high as 5.8 percent in the first quarter of 2008, data on the industry regulator's website show.

Premier Wen Jiabao said last Wednesday that the country's top priority is stabilizing prices and the government doesn't plan to alter the direction of economic policies. The yuan gained 0.9 percent against the dollar in August, the biggest advance of 2011, as data showed inflation reached a three-year high of 6.5 percent in July. The yuan fell 0.02 percent to 6.3826 per dollar last Friday.

Fed stimulus

The US Federal Reserve cut its benchmark interest rate to a maximum of 0.25 percent in December 2008 and on August 9 pledged to maintain record-low borrowing costs through mid-2013 to support the US recovery. The Fed has also announced two rounds of bond purchases to help the economy, a policy known as quantitative easing that boosts the supply of dollars. Chairman Ben Bernanke said on August 26 that further stimulus measures are possible. The next policy review concludes on September 21.

"If the Fed does have a QE3, or even hint of a QE3 coming soon, that could potentially cause the credit markets to perform better going ahead, including dollar debt," said Wee-Ming Ting, the Singapore-based head of Asian fixed-income at Pictet Asset Management, which oversees US$18.2 billion in emerging-market debt. "It's important to be not too negative." He declined to disclose whether his fund holds Chinese corporate dollar debt.

The securities lost 3.6 percent in August, the biggest drop since October 2008, according to JPMorgan Chase & Co indexes. Notes sold by corporate issuers in India lost 2.2 percent, those in Brazil fell 1.8 percent and Russian debt shed 1.3 percent, the data show.

Investor appetite for foreign-currency bonds of Chinese companies may remain weak "for the time being" as concern persists over the reliability of their financial reporting, said Kokusai's Irimura. Sino-Forest Corp's shares were suspended from trading in Toronto on August 26 after the regulator said directors of the firm may have engaged in acts "related to its securities" that they "knew or should have known" perpetuated a fraud.