REPEAT: China Money Wk: Corp Bond Rally May Be Short-Lived

Repeats Story Initially Transmitted at 13:23 GMT Mar 29/09:23 EST Mar 29

     BEIJING (MNI) - Although China corporate bonds could be a good near-term

investment, caution is the watch word for investors longer-term, as the effects

of the new regulatory regime take hold.

     The credit spread narrowed this week, helped by liquidity condition,

risk-adverse sentiment from trade wars and fading concerns that new regulations

factors will impact bond markets. Three-year and seven-year credit spreads

between China government and corporate bonds narrowed sharply from 185 and 182

basis points last Friday to 164 and 174 basis points respectively this

Wednesday.

     The primary market rates of negotiable certificates of deposit (NCD) also

dropped sharply in the same period: the six-month primary NCD rate issued by

joint-stock banks fell from 4.8467% two weeks ago to 4.0833% on Wednesday,

before rebounding to 4.2250% on Thursday.

     The drop in NCD rates began two days earlier than the drop in corporate

bonds yields, seeming to suggest the former drives the latter.

     Lower NCD rates mean lower funding costs for bond investors, enabling carry

trades, driving corporate bonds yields lower.

     --NCD RATES LOWER

     Also, the NCD rate is one of the most important liquidity signals for the

bond investors. Lower NCD rates will send a signal to bond investors that the

liquidity condition has improved dramatically, and liability pressures caused by

financial deleveraging campaign alleviated.

     However, the rapid fall was not caused in large part by above reasons, but

because of soaring demand from wealth management funds before the publication of

new regulations.

     Despite this one-time factor, if the PBOC maintains a more relaxed stance

in the second quarter (likely if economic growth slows), and given that loan

demand in the second quarter is usually weaker than the Q1, the funding

pressures for banks will be lower and the average NCD rates will be lower than

the first quarter, providing a bullish environment for corporate bond investors.

     A recent survey by China International Capital Corp. also suggested

investors have become more optimistic over high-rating corporate bonds: a total

47% of respondents agreed the high-rating corporate bonds will outperform in the

Q2, higher than the 21% in the December survey.

     --BOND DEMAND TO SLOW

     However, investors must remain wary over the long-term impact of regulation

on corporate bonds. As the regulation aims to bring off-balance-sheet assets to

banks' balance sheet, banks' capital requirements will increase and banks will

prefer investing in China Government Bonds and Policy Bank Bonds rather than

corporate bonds.

     The demand for corporate bonds will also decrease, or at least slow, as the

clamp down on channel businesses continues.

     The pipeline of upcoming corporate bond supply is also an issue and will

likely cap gains. As other funding channels become harder to access, bond

issuance will increase. Net issuance of corporate bonds so far this year has

amounted to CNY378.3 billion, higher than CNY41 billion decreasing in the same

period last year, underlining that both demand and supply will continue to

pressure corporate bonds.

--MNI Beijing Bureau; +86 10 85325998; email: he.wei@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com