China investment vehicles will issue more bonds

Updated: 2010-08-06 11:47
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China will probably let more investment companies backed by local governments issue bonds, according to the group that regulates the country's interbank bond market.

On July 14, Shangrao City Construction Investment Development Group Co sold 1 billion yuan ($148 million) of seven-year bonds, restarting sales a month after a central- government-imposed halt, the National Association of Financial Market Institutional Investors said in a report today.

Local governments set up financing vehicles to fund projects such as highways and airports after the central government restricted their direct-borrowing power this year because of concern money is going to non-viable projects.

"Under a situation where China's economy might slow in the second half of the year, and as fiscal policy is expected to strengthen, issuance of local government financing platform bonds will inevitably increase," the group said.

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It was reported last month that the National Development and Reform Commission, China's top economic planning agency, stopped approving bond issues by local financing platforms on concern that they might not be able to repay debts.

"In the intervening month the National Development and Reform Commission has again approved new bonds," according to the group, also known as Nafmii. The interbank market is China's most-liquid bond market.

The group also said the People's Bank of China, the central bank, may cut the deposit reserve ratio in the third quarter. The central bank is likely to sell more than 1.5 trillion yuan of notes in the third quarter, as 1.359 trillion yuan of debt matures, it said.

Chinese monetary authorities have refrained from raising interest rates this year to cool economic growth that slowed to 10.3 percent in the second quarter. Instead, they have increased the ratio of reserves lenders must leave at the central bank.

"Loans and increased issuance of bonds will put definite pressure on the control of monetary supply," the report said. While the central bank will continue its open market operations, "there is a possibility it may lower the deposit rate in the next quarter" as well, it said.