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--Outstanding Bond Structure Suggests Costs Won't Rise Much In Next Year
     BEIJING (MNI) - A year after the Chinese bond bear market started, overall
funding costs of debt issuance have risen only modestly, contradicting fears
that higher bond yields would damage the economy.
     China bond market yields have risen steadily since November last year.
Benchmark 10-year China government bond yields have risen more than 120 basis
points from 2.7375% on Nov. 1, 2016, to 3.9601% on Tuesday, triggering analysts'
worries that higher yields will cause higher funding costs for the real economy
and thus suppress economic growth.
     However, by calculating the weighted average of outstanding coupon rates
for bonds and issuing rates for shorter-term securities, which reflect financial
costs to the government and companies, MNI calculations show overall funding
costs by issuing bonds did not rise sharply over the last year for most debt
securities.
                                                  Nov. 28, 2017
                    Nov. 1, 2016    Nov. 1 2016,       Weighted    Nov. 28, 2017
                Weighted Average        Weighted        Average         Weighted
Types of Bonds      Coupon Rates   Average Terms   Coupon Rates    Average Terms
--------------------------------------------------------------------------------
China
Government
Bonds (CGB)               3.761%           11.70         3.707%            11.55
Local
Government
Bonds (LGB)               3.177%            6.25         3.338%             6.28
Policy Bank
Bonds                     3.845%            7.99         3.884%             8.18
State-Owned
Enterprise
Bonds                     5.995%            7.92         5.892%             8.08
Private
Corporate
Bonds                     5.149%            4.93         5.189%             4.87
Medium-Term
Notes                     5.035%            5.06         5.051%             4.90
Commercial
Paper                     3.308%            0.78         4.955%             0.73
     The table above shows that only commercial paper issuers saw a dramatic
cost increase during the past year, with weighted average coupon rates up 1.647
percentage points, not surprising given commercial paper terms are less than a
year and the pressure the government deleveraging campaign has put on short-term
financing. Despite government efforts to rein in local government borrowing, the
average coupon rates of local government bonds increased only around 16 basis
points in the past year.
     China government bonds and state-owned enterprise bonds saw their
outstanding coupon rates fall, not rise, during the past year.
     This surprising result was not caused by a contraction in the amount of
outstanding bonds. Only the outstanding value of short-term notes saw a decline,
from CNY2.28 trillion Nov. 1 last year to CNY1.52 trillion on Tuesday, while all
other types of bonds recorded positive growth.
     The result can be partly explained by the maturing of high-cost bonds.
Using China government bonds as an example, CGB tenures generally include
one-year, three-year, five-year, seven-year, 10-year and 30-year instruments.
What matured between last November and Tuesday were mainly CGBs issued in 2007,
2012 and 2014.
     The 2007 and 2014 issues were the highest yielding CGBs. The average coupon
on three-year CGBs was 3.7976% in 2014, even higher than Tuesday's 3.7836%. The
average coupon on 10-year CGBs was 3.9921% in 2007, much higher than the average
yield on CGBs with the same duration so far this year of 3.5449%. Bonds issued
in 2007 and 2014 and maturing over the past year accounted for around 50% of
total maturing CGBs during the period.
     Another reason overall coupon costs rose slowly or even dropped over the
past year is the general trend toward shortening of terms. Facing rising bond
costs, many issuers chose to issue shorter-term bonds to lower their funding
costs. Only policy bank bonds and state-owned enterprise bonds saw a big
increase in terms, while other types of bonds saw lower or similar terms.
     Overall coupon costs of private corporate bonds rose slowly, as more
companies chose to issue puttable bonds, enabling bonds investors to sell bonds
back to the issuer in advance. To prevent such pre-maturity selling from
happening, bond issuers generally added a clause enabling them to change (raise)
the coupon rate before the start of the allowable sales period. Because these
bonds granted investors a put option, the issuing costs were lower.
     As of Tuesday, 71.70% of outstanding private corporate bonds in terms of
value and 74.87% in terms of volume were puttable, compared with 70.06% and
72.31% on Nov. 1, 2016.
     Pressures on outstanding coupon rates emanating from rollovers of maturing
bonds in the next year will remain limited.
     Of total outstanding bonds, only CGBs, policy bank bonds and medium-term
notes will have maturation rates of more than 10% in the next year in terms of
value, with some 13.0% of CGBs, 15.9% of policy bank bonds and 17.3% of
medium-term notes expiring.
     More than half of CGBs maturing over the next year were issued in 2013 and
2017, when coupon rates were high. The average five-year CGB yield was 3.6235%
in 2013, around 25 basis points lower than that on Tuesday, which will result in
only a small rise in coupon costs for CGB issuers. For medium-term notes
maturing next year, 40% were issued in 2013 and so will also produce only a
relatively small increase in rollover financing costs
     A rough and conservative estimate of the expected rise of overall coupon
rates coming from the rollover of maturing debt over the next one year --
ignoring the impact of efforts to lower coupon costs while assuming that bond
yields remain at the current high level for the whole of next year -- point to
policy bank bonds and medium-term notes seeing their overall coupon rates rise
no more than 20 basis points, while CGBs will rise no more than 15 basis points.
Other types of bonds are unlikely to see their outstanding coupon yields rise
more than 10 basis points.
     Moreover, of total private corporate bonds, around 15% with clauses
allowing issuers to adjust the coupon rate can be triggered within the next
year, and most of those bonds were issued in 2015 and 2016. Assuming all issuers
choose to raise their coupon rates by 170 basis points (reflecting the
difference between yields in 2015-2016 and the current level), then that would
produce around a 25-basis-point increase to the outstanding weighted average
coupon rate for private corporate bonds. Adding in the 7 to 8 basis point
increase resulting from the rollover of maturing private corporate bonds,
overall coupon costs for private bonds issuers could rise a bit more than 30
basis points.
     However, the above estimate may exaggerate somewhat the upward pressure on
financing costs, considering it is very unlikely that all companies will choose
to increase their coupon rate that much, and some could lower coupon costs to
force bond holders to sell back their puttable bonds if they think the financing
cost is too high. Therefore, it is unlikely that overall funding costs for
private companies will rise significantly over the next year, even if bond
yields remain at their current high levels.
--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com
--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com
--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com
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