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AvidFan

China Has Spotted The Investor Hungry For Yield

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http://www.bloomberg.com/apps/news?pid=206...id=aptOZEoka1NY

China to Force Higher Rates on Corporate Bonds to Spur Demand

By Bloomberg News

Aug. 13 (Bloomberg) -- Chinese companies will need to boost yields on some new corporate bonds to make them more competitive as the government seeks to spur investor interest in fixed- income securities.

New five-year notes in the interbank market -- the biggest of China's three corporate bond markets -- must offer a minimum 4.2 percent yield, according to minutes of an Aug. 7 meeting between the National Association of Financial Market Institutional Investors and 16 underwriters. That compares with 3.9 percent for an Aug. 3 issue by Aviation Industry Corp., China's biggest aerospace company.

China is urging companies to tap bond markets for funding as regulators warn that bad loans pose a growing risk to the banking system. Yields on new corporate bonds have dropped below those in the secondary market because of the "strong bargaining power of companies," said Feng Guanghua, deputy secretary of NAFMII, as the Beijing-based association is called.

"Our association supports such coordinated efforts to correct distorted values," Feng said in a phone interview today, declining to confirm the rates.

The minimum interest on one-year commercial paper should be 2.3 percent and on five-year notes 3.35 percent, according to the minutes, obtained by Bloomberg News.

Banks have made a record 7.73 trillion yuan ($1.1 trillion) of new loans this year -- more than 10 times the 692.3 billion yuan of debt sold by companies on the interbank market. Lending slumped in July to less to than a quarter of the level in June.

"Rate Gap"

The minimum rate guidelines, which took effect after the Aug. 7 meeting, apply to securities with the top AAA rating. NAMFII is supervised by the central bank and is responsible for registering corporate bonds on the interbank market.

Primary bond market yields aren't reflecting the bonds' true value, according to the minutes of the meeting.

"It's important to address this rate gap because it's deterred some investors from the market and is unhelpful to the industry's growth," according to the minutes.

The average secondary market yield for five-year bonds has risen 1.2 percentage points to 4.14 percent this year, Chinabond.com figures show.

Nice little trick. Maybe they've been reading the Telegraph and realise that blowing $500 billion without proper risk analysis has probably stored up an apocalypse of non-existent credit quality for Chinese banks.

Shift the risk to investors hungry for a simple yield instead, since corporate bonds are in vogue at the moment.

The next instrument to blow up or at least show huge losses over the coarse of the depression?

Edited by AvidFan

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