Focus turns to bonds ahead of monetary easing

PUBLISHED : Tuesday, 08 May, 2012, 12:00am
UPDATED : Tuesday, 08 May, 2012, 12:00am


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Agricultural Development Bank of China (ADBC), one of the mainland's largest policy lenders, will sell 15 billion yuan (HK$18 billion) in debt on Thursday.

The aim is to test investors' appetite for bonds amid expectations of further monetary easing by Beijing.

ADBC will offer five-year notes to investors on the China Foreign Exchange Trade System, the mainland's interbank market, one day after a 1.5 billion yuan sale by a Hunan local government financing vehicle (LGFV), according to their respective statements.

The debt issuances coincide with heightened expectations that Beijing will, for the second time this year, cut banks' reserve requirement ratio (RRR) later this month, a move likely to inject liquidity into the money market.

This month, more than 500 billion yuan of debt will be sold on the interbank market, a research report by AVIC Trust predicts.

Beijing is set to slash the RRR by another 50 basis points this month after it did so in February, which could free up several hundred billion of yuan that banks must otherwise deposit at the central bank.

'It's still too early to predict whether the bond market would immediately become more active following the RRR cut,' said Gu Weiyong, the chief investment officer at Ucon Investment Management in Shanghai. 'In the long term, China's corporate bond market will grow fast, because the government has attached greater importance to it.'

Officials became aware of the bond market's importance in the past two years amid companies' mounting demands for financing.

The lending spree by Chinese banks in 2009 and 2010 in line with the government's stimulus package failed to benefit the nine million privately owned businesses, most of which were unable to secure loans despite struggling to survive the global slowdown.

Only companies with credit ratings of AA and above can issue bonds on the bond market, though corporate and securities laws do not limit bond issuances by small businesses.

On the interbank market, about 500 LGFVs are awaiting to raise funds, after commercial lenders stopped granting fresh credits to them last year.

Many of the troubled financing vehicles that borrow money on behalf of local governments to fund infrastructure projects will not be able to pay back loans owed to banks.

Nonetheless, the proceeds from LGFVs' sales of bonds jumped 35 per cent in the first quarter from a year earlier to 84.5 billion yuan.

Hunan Provincial Expressway Construction Group, a LGFV that delayed a payment of 3.11 billion yuan in interest last year, is selling 1.5 billion yuan of bonds tomorrow.

Guo Shuqing, newly appointed chairman of the China Securities Regulatory Commission, is seeking to bolster cash-hungry small enterprises by setting up a high-yield bond market on the stock exchanges.

People familiar with the plan said the regulator was putting the final touches to the high-yield bond market, which could be launched before the end of June.

Shanghai Stock Exchange chief executive Zhang Yujun told a conference in Beijing yesterday that the bourse was doubling its efforts to create the market, according to Xinhua.