(Yicai) Feb. 23 -- The market for Chinese urban investment bonds has surged since the fourth quarter of last year, pushing yields sharply lower and raising concerns that this bull market could reinforce the long-held belief that such bonds are redeemable.

The surge was partly triggered by the central government’s go-ahead for local authorities to sell special refinancing bonds and use the proceeds to repay maturing debt, including some high interest-bearing urban investment bonds, said Luo Zhiheng, chief economist at Yuekai Securities.

Tighter central government oversight of urban investment bond sales was also a catalyst. The number of bonds issued was pared back after the government toughened regulations, leading to more buyers than new bonds, resulting in a big narrowing of yields, according to Hu Hengsong, deputy general manager at Caida Securities.

Urban investment bonds are corporate notes issued by urban investment companies, which are investment and fundraising platforms affiliated with local governments, and are seen by many investors as de facto government bonds that are therefore unlikely to default. The funds raised mainly go to finance infrastructure or public welfare projects.

This belief in rigid redemption, a situation in which there is an implicit assurance that an investment will be returned on maturity, is held without sufficient evidence to support it. Indeed, the local government debt repayment crisis of recent years once dispelled such blind faith.

But the market rally since the last quarter of 2023 suggests that the belief among investors that local governments are “watching the backs” of urban investment companies regarding debt will continue in the short term, Hu said.

“Although urban investment companies are all pursuing marketization, the business relationships between them and local governments, as well as various government support targeting them, will not weaken along with this transformation in the short term,” Hu said. “Investors will still deem urban investment companies as special bond issuers.”

Hu said the market-oriented shift by urban investment companies needs to continue so as to reduce their dependence on local governments. Only then will investors stop associating urban investment company debt with local government debt, he pointed out.

Editors: Tang Shihua, Martin Kadiev