IT’S been the worst month for China’s local corporate notes in two years. And it might just be the start, as the nation’s top bond fund manager said yield premiums could rise further in 2018. The government is stepping up efforts to trim the world’s largest corporate debt burden. Financial institutions are hoarding cash amid expectations the government will announce more measures to curb leverage, and that is pushing up borrowing costs in the money market. “There is a high probability that credit spreads will widen next year given that there hasn’t been any improvement in the tight liquidity,” said Zhang Qinghua, general manager of fixed-income fund investment at E Fund Management Co. His E Fund Stable Value Bond-A fund has returned 15 percent, the best among fixed-income funds in China with more than 3 billion yuan (US$455 million) in assets. Policymakers must walk a fine line. Bond market pain has already spilled over into equities, as rising borrowing costs tarnish corporate balance sheets. Economic growth could also be jeopardized if deleveraging sparked a rash of defaults. For now things appear under control. While two more firms missed bond deadlines recently, there have been only about 21 note defaults this year compared with 29 for all of 2016. Still, the fallout from rising financing costs is clear. Sales of local corporate notes this year are set for the lowest level since 2014. The average yield premium of three-year AAA corporate bonds over government notes has widened 31 basis points this month to 148 basis points, the biggest increase since March 2015. The Shanghai Interbank Offered Rate has jumped 28 basis points this month, the most since February. Despite those market moves, the government is rolling out more deleveraging measures. Financial regulators this month proposed sweeping rules to curb risks in China’s US$15 trillion in asset management products. The government is still focused on preventing financial risks and curbing leverage, as economic slowdown looks limited, according to Zhang. (SD-Agencies) | 