(Yicai) Jan. 31 -- There has been a run on some urban construction investment bonds by non-banking institutions since the second half of last year, especially short-term bonds, thanks to measures taken by the central government to resolve local government debt, industry insiders told Yicai. And the phenomenon should carry into this year.

Non-banking financial institutions with a high-risk appetite are rushing to buy urban investment bonds with a term of under 12 months, and some with a higher risk appetite even prefer varieties with a term of above two years, two employees in the risk control departments of securities asset management firms told Yicai.

Urban construction investment bonds are bonds issued by investment and financing platforms of local governments. They are the main component of China’s local government implicit debt.

Extending debts and cutting interest rates are two major tools used by the central government to resolve debts held by state-owned enterprises under local governments, including local government financing platforms, they said. These policies aim to prevent systemic risk within one to two years.

Regions with weak economies are facing less liquidity pressure this year thanks to favorable policies, reducing the possibility of default, Wang Lei, director of Corporate Ratings at US credit rating agency S&P Ratings’ China arm, said to Yicai.

Policies to resolve debts provide support to urban investment firms’ creditworthiness and credit fundamentals, and such policies will likely to continue, said Liu Xin, director of fixed income investment at BlackRock Fund.

Commercial banks, though, are not active participants in the urban investment bond bull market, because banks play a major role in resolving local government debt and have undertaken the task of helping highly indebted regions issue more debt, they said. So buying more urban investment bonds in the secondary market will create an additional burden for them.

BlackRock Fund is still optimistic about urban investment bonds this year, especially long-term ones, said Liu. There will likely be limited room for further growth of bonds with short maturities because of the big price gain last year, he added.

China allowed many local governments to issue special refinancing bonds from October last year to help pay off maturing existing debt, particularly those regions that are not financially strong. So far they have issued around CNY1.3 trillion (USD195.7 billion) worth, easing the risk of default, although it is only enough to repay less than one quarter of the CNY5.5 trillion (USD769 billion) of urban investment bonds due to expire before the end of this year. 

But this is should be sufficient for those regions experiencing difficulties in refinancing, as most of the new debt quotas are distributed to these regions, significantly improved their creditworthiness, according to estimates by S&P Ratings (China).

Editors: Tang Shihua, Kim Taylor