New | Chinese bonds may be shaky as equities go into swoon
While uncertainty grows over corporates' losses in the equity market, huge municipal issuance after the swap programme has driven up yields
With stocks plummeting, money rates rising and the yuan facing uncertainty, Chinese investors are fleeing to the one corner of financial markets still standing - long-dated bonds.
However, China's long bonds may be less of a sure bet than an aggressively easing central bank and weak growth would usually imply. Corporate debt may do better, but many Chinese corporates own domestic stocks and in many cases the extent of their losses remains unknown.
For official debt, the problem is the massive local government refinancing operation kicked off in May to help city governments swap bank loans and other high-interest debt for new municipal bonds.
This has prompted a 36 per cent rise in interbank bond issuance for the year to July, driven largely by the swap programme, which was expanded by 1.2 trillion yuan on August 27 to 3.2 trillion yuan for this year. To throw that in relief, the total outstanding value of China's treasury bonds is only 9 trillion yuan.
This huge issuance has pushed yields higher and, although municipal yields fell after the central bank's latest rate cut on August 25, they are still up by nearly 50 basis points since the first 2015 issuance in May.
"Given that [municipal] bond issuance this year is now up to 1.4 trillion yuan, it's not surprising that banks are saying 'we've swallowed enough of this, you need to give us higher yields or more liquidity'," said Oliver Barron, the head of research at consultancy NSBO in Beijing.