Big Drop in Enterprise Bond Issuance in July

The number of enterprise bonds issued in July shrank significantly to the lowest since September 2011 as regulations were strengthened and low market sentiment permeated the world of investment.

Enterprise bonds are issued by institutions affiliated to central government departments, businesses solely funded by the State, State-controlled enterprises and other large State-owned entities. Only eight enterprise bonds were issued in July with a combined value of 10.2 billion yuan (US$1.66 billion), a 60 percent month-on-month decrease and a 70 percent year-on-year decline, according to statistics from the China Central Depository Trust & Clearing Co Ltd, the country's bond market clearing house.

Among the eight bonds, five are city investment corporate bonds. Funds from them will be spent on affordable housing and shantytown transformation projects.

The credit crunch in June and the end of July, strict examination over ratings of enterprise bonds and low market sentiment because of doubts about the efficacy of bond markets were the major reasons for the low issuance of enterprise bonds, said analysts.

The bond market is facing difficulties it has rarely witnessed before. Non-financial enterprises find it challenging to attract significantly large funds, regulators are conducting strict examinations over bond issuance and bond yields are falling. All these discourage investors, said analyst Wang Jing from Goldstate Securities.

Many bond issuers were downgraded after regulators launched a recent check on the ratings of enterprise bonds. In June, a total of 38 issuers were downgraded by China's rating firms, according to Guotai Junan Securities Co. It was the highest number since the nation's third-biggest brokerage started compiling data in 2005.

Institutional investors reduced their holdings of enterprise bonds in July, especially those with lower ratings. Meanwhile, the yields of enterprise bonds with lower ratings fell significantly, according to a report published on Tuesday by the China Central Depository Trust & Clearing Co.

"Recent moves and policies of regulators have indeed had an obvious effect on the bond market. It is a signal that regulators are keeping their eyes on the long-term through changes in bond market conditions at the expense of the short-term volatility of the bond market," said Yang Xudong, an analyst with Aijian Securities.

Investors should no longer blindly invest in State-owned companies suffering from overcapacity without good credit analysis because their bonds bear default risks, said Jiang Chao, a bond analyst in Shanghai at Haitong Securities.

Analysts said the sluggishness of the bond market may not endure because the authorities are making efforts to meet economic growth targets.

Bond issuance is an extremely important funding source for enterprises alongside bank loans. Recent factors that have affected the bond market are short-term issues. The market reaction to regulators' moves and policies may have been over the top. Once the market adjusts itself and the short-term factors are eliminated, there may be another bullish phase, said Wang.

"Although constraining liquidity has the noble goal of stopping bad lending practices, there is clearly a risk of hurting the wider economy," said Alaistair Chan, an economist with Moody's Analytics. If firms are afraid of borrowing, this could hurt investment for the remainder of the year, said Chan.