(Yicai Global) Dec. 12 -- Local governments in China have been accelerating early bond redemption in the second half to cut regional debts in line with new financing management policies.

Total issuance of city investment debt reached CNY1.75 trillion (USD264 billion) this year, down 30 percent from the same period last year, per data from Chinese financial researcher Wind Info. Early redemption so far this year has reached CNY326.7 billion, up 76 percent on the year, while net issuance of city debt has fallen by CNY1.1 trillion to CNY294.6 billion, the lowest level since 2011, after explosive growth last year.

Early redemption will keep on growing and will gradually spread to more areas, a public offering bond fund manager in Shenzhen told Yicai Global. However, it won't grow too fast and isn't a "shock therapy" to solve debt problems, he added.

China's cabinet, Ministry of Finance and National Development and Reform Commission have brought in new policies in recent years to regulate local government debt and their financing platforms. The finance ministry this year introduced a number of documents stating that local authorities may not borrow illegally or provide implicit support to debt financing companies. It also emphasized that, excluding those specially labeled local government debt, all existing city investment debts are not held by local authorities.

There are two conflicting market views on the practice of redeeming bonds early. One sees the issuer as being in a 'disguised default,' which will have a negative impact on the valuation of city investment debts. The other believes that early redemption protects the interests of investors and greatly reduces the risk of default.

"As city investment debt practices change, the credit analysis of the market will gradually close in on that of general state-owned enterprise debts," Zhang Yi, general manager of the fixed income department of Rongtong Fund Management Co., told Yicai Global. The importance of a number of indicators is increasing, such as the issuer's asset quality, business operations, cash flow and debt-repaying strength. This means that investment in city bonds needs to be strictly screened, and attention must be paid to improve business capacities of the debt entities, he added.

City investment bonds will gradually change from unified to differentiated pricing before returning to an industrial price model, but this process will be slow, the aforementioned fund manager mentioned. In terms of investment strategy, urban investment bonds are still a good area, but investors need to pay attention to risks associated with maturity structure.

"Urban investment bond entities generally have a single business and are over dependent on financial subsidies," Zhang added. "They will be vulnerable to liquidity trouble, so investors should be more wary and avoid bonds with weak economic strength and low importance among multiple platforms in the region. These bonds are poor in revenue generation and have low risk prevention capabilities," he said.