China’s Internet giants are providing a haven for bond investors fleeing mounting default risks among the nation’s state-owned enterprises.
Investors are snapping up bonds from Alibaba Group Holding, Baidu and Tencent Holdings, a bright spot in an economy growing at the slowest pace in a quarter-century.
The rising demand also reflects a broader shift in China’s economy away from smokestack industries toward private-sector services such as e-commerce, online finance and entertainment. Creditors have grown wary of state-backed firms after Moody’s Investors Service cut its outlook on 38 of them along with the government in March.
Dollar bonds from Internet firms have returned 4.2% this year, the nation’s best-performing sector, according to Bank of America Merrill Lynch indexes. Alibaba’s securities due 2034 have gained 9% since December 31, while 2025 notes of Baidu and Tencent both returned more than 6%. Alibaba, China’s biggest e-commerce company, has cashed in by raising $4bn from loan bankers and Tencent, operator of China’s most popular messaging services, borrowed $2.45bn in December.
“US investors are becoming big players in Chinese technology bonds,” said Anthony Leung, credit analyst at Nomura Holdings in Hong Kong. “With oil prices still being weak and the outlook on many SOEs cut to negative by Moody’s, only Chinese Internet names are immune.”
Risks of nonpayment among Chinese state firms have spread as Premier Li Keqiang sought to cut the number of “zombie companies.” Government-backed Dongbei Special Steel Group Co failed to make two bond payments in the past two weeks. At least six Chinese firms reneged on obligations last quarter versus none in the year-earlier period.
Private companies have cut debt to 53% of assets from 58% in 2007, while state-owned enterprises have seen those figures jump to 62% from 55%, according to estimates from Shi Kang, an associate economics professor at the Chinese University of Hong Kong. Research by Bloomberg Intelligence last year showed that China could have achieved economic growth exceeding 8% in the first half of 2015 had the nation’s bloated and inefficient state-owned enterprises kept pace with private firms.
Alibaba doubled profit in the three months ended December 31 amid a push into the countryside and after it capitalized on an online-sales extravaganza. Rico Ngai, a public relations official at Alibaba in Hong Kong, declined to comment.
“We invested in Alibaba because of the incredible online sales growth in China and their leading position to best capture that growth,” said Andy Stone, senior investment grade analyst at Atlanta, Georgia-based Invesco Ltd, which manages $737.5bn globally. “It’s still growing in solid double digits. Where else can you find that kind of revenue growth potential?”
In a sign of Alibaba’s clout, British online fashion retailer Asos said Thursday it will close its Chinese distribution center, Shanghai office and local website, after failing to lure customers away from the Chinese firm.
Alibaba was offering an all-inclusive fee of 123 basis points more than London interbank offered rate for banks committing $200mn or more to its up to $4bn five- year loan, people familiar with the matter said last month. That makes it the lowest priced loan for a Chinese technology company this year, according to data compiled by Bloomberg.
Alibaba “was less affected by Moody’s negative outlook change on the China sovereign given it is not government-owned,” said Nicole Hsieh, senior portfolio manager at Australia’s First State Investments in Hong Kong, which manages $142.1bn of assets.
Tencent posted a 22% jump in profit in the final quarter of 2015, while search engine Baidu enjoyed a seven-fold increase. The three Internet giants recorded combined revenue of 265.6bn yuan ($41.1bn) for 2015, up 32% from a year earlier, Bloomberg-compiled data show. Their aggregate debt increased only 19.3% to 158.9bn yuan in the period.
Tracy Hu, a media official at Baidu, declined to comment because the firm can only release limited information ahead of earnings report. Tencent’s media department didn’t immediately respond to a request for comment on its fundraising plans.
Amid the peer-beating returns, there are concerns that the Internet companies are growing too fast for comfort. Alibaba announced mergers and acquisition deals worth $1.54bn this year after a $27.6bn binge in 2015, according to Bloomberg data.
Even so, the allure of the firms is strong given their growth prospects, according to Mirae Asset Global Investments, which manages about $75bn. The money manager has bought notes issued by all three Chinese Internet firms, tapping its experience of buying debt in US technology companies like EBay.
“Alibaba’s numbers tell everything,” said Kim Jinha, head of global fixed income at Mirae. “It’s quite hard to find within emerging markets an investment-grade credit with such a dominant position in e-commerce with little competition, and still growing aggressively into promising electronic-payment and other financial services.”