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Finance

Corporate China rattled by prospect of tighter credit

Holding off on bond issuance amid unstable interest rates

The People's Bank of China.

SHANGHAI -- Chinese companies are shying away from issuing bonds amid gyrating short-term interest rates as Beijing signals a less-accommodative monetary stance.

The nation's monetary authorities are trying to thread the needle of reducing liquidity to combat financial system risk without stalling the economy.

State-owned Hangzhou Financial Investment Group backed away last Wednesday from a 1.2 billion yuan ($174 million) bond issuance. The city-managed company, which invests mainly in infrastructure in Hangzhou, blamed financial market volatility but is seen as having canceled because subscriptions had not materialized.

Fellow state enterprise Jiangsu Guoxin Investment Group likewise called off a 1.5 billion yuan bond sale late last month, deeming investor demand insufficient. Sichuan Railway Investment Group, another state-owned company, said it would delay a 3 billion yuan issuance until rates stabilized.

Long-term rates began climbing from a recent low in the 2.6% range in October, hitting the 3.4% range at one point, and the rise has reverberated in interest rates on bond issuance. More than 200 companies have since put off or canceled issuing bonds totaling at least 100 billion yuan.

Many issuers have instead turned to bank lending. Such loans are often cheaper because they are priced off the People's Bank of China's benchmark lending rate. But there is a movement among banks toward reducing discounts for big companies, according to a source at a major bank, pushing up the cost of this borrowing.

Beijing has shifted its monetary policy, described before as "prudent," to a more cautious stance of "prudent" and "neutral," as announced at the Central Economic Work Conference in December. The market took this to mean that even if the PBOC did not actually raise rates, liquidity would become less abundant than before. PBOC Gov. Zhou Xiaochuan reinforced this view in a news conference March 10, saying overabundant funds could do serious harm to the economy.

The PBOC has already raised its interest rate when supplying funds to financial institutions via open-market operations and is forgoing these operations more often. Long-term rates are rising to match advancing short-term rates.

But confusion persists in the market, given the long period of relaxation until now. Seven-day repurchase agreement, or repo, rates -- a measure of interbank borrowing costs -- nearly tripled to the 9% range on March 21.

The spike occurred because of suspected repo defaults, according to a source at a Chinese bank. The PBOC apparently injected several hundred billion yuan into the market that day. Repo rates briefly retreated to the 2% range, only to later rebound to 3%. Signs of instability persist, with overnight repo rates also jumping to 20-30% toward the end of March on the Shanghai Stock Exchange.

Tighter monetary policy may be indispensable in controlling a real estate bubble and financial risk, but if interest rates continue to climb, they could drag on the Chinese economy. Local governments have more than 15 trillion yuan in debts, with 2 trillion yuan to 3 trillion yuan maturing each year. The cost of servicing this debt has fallen amid prevailing low rates but may start to rise.

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