(Yicai) March 19 -- China could deepen its monetary easing efforts to alleviate high borrowing costs, following a surge in canceled corporate bond issuances, according to analysts.

Considering China's objective of reducing financing costs, the increasing difficulty of primary issuances may accelerate the implementation of monetary easing policies, Qiu Yuanhang, a fixed-income, currencies, and commodities analyst at Citic Securities, said to Yicai.

Yields are widening amid a surge in treasury issuances. Since February, the yield on the 10-year treasury bond has moved to 1.89 percent from 1.6 percent, rising by nearly 30 basis points. Meanwhile, the yield on the 30-year treasury bond has jumped to 2.13 percent from 1.81 percent, soaring by over 30 bps.

Institutional insiders said that several factors, including the persistent funding tightness after the Chinese New Year holiday, large banks' limited funds, converging expectations for interest rate cuts, concerns about institutional redemptions, and a rising supply of local government bonds, have led to an increase in bond yields.

The expanding yields indicate that investors need more incentive to purchase bonds, leading to higher rates in the primary market compared to the secondary market, while the ongoing increase in borrowing costs is putting pressure on issuers.

For example, the municipal government of Dalian auctioned a 30-year refinancing special bond on March 18 with an issuance rate of 2.35 percent, which is 30 basis points higher than the comparable treasury bond yield, according to data from Wind.

Tan Yiming, a fixed-income analyst at China Minsheng Bank, said that there has been an abnormal increase in issuance spreads since the fourth quarter of last year. On the supply side, local governments have boosted the volume of bond issuances amid rising pressures whereas the demand side has faltered with factors such as rising funding rates, macroeconomic uncertainties, and large banks' insufficient funds.

From January to February, the issuance scale of special bonds exceeded that of last year, but was still lower than the sums in 2023, 2022, and 2020, according to data from Minsheng Securities. Within this year's borrowing, bonds with a maturity of 10 years or above account for more than four-fifths of the total, including 20 and 30-year maturities.

Canceled Credit Bond Issuances

Companies are walking back on their plans to issue bonds amid high borrowing costs. In the first two weeks of this month, nearly 50 credit bonds were canceled or postponed, exceeding CNY32 billion (USD4.4 billion). Last week alone, 29 bonds were canceled or delayed, totaling over CNY18 billion, a new high since the fourth quarter of 2022.

The main reason behind the change of mind is volatility in the secondary market, especially affecting high-grade issuers. Analysts explained that highly-rated issuers are more sensitive to interest rates, and thereby, more likely to cancel or postpone bond issuances during periods of significant market volatility, opting to wait for more stable market conditions.

Ming Ming, chief economist at Citic Securities, pointed out that a substantial rate hike would contradict China's core objective of reducing the overall financing costs. Beyond valuations on the secondary market, it is essential to focus on the actual costs of fiscal and corporate credit financing, Ming added.

Chen Jianheng, a fixed-income analyst at China International Capital Corporation, wrote in a research report that after this month, China's pressures to stabilize growth could increase, prompting deeper efforts for monetary easing. That could lead to a gradual decline in the central bank's policy rates, with an expected return to falling bond yields.

Editor: Emmi Laine