Since August 2024, the credit market has once again seen a peak in the cancellation and postponement of bond issuances. We believe that the cancellation of issuances is the result of the resonance of multiple factors. First, the issuers actively manage their financing costs. Second, they protect their "pricing power" over the future market to avoid releasing a "negative impression" due to high financing costs. Third, the increase in local government bond supply has made the market more cautious. Since November, there has been a marginal slowdown in the cancellation of credit issuances. Looking ahead, during periods of rising credit interest rates, the scale of cancellations and postponements tends to increase marginally. Therefore, under supply pressure, the scale of cancellations and postponements may rise marginally in the short term. If the central bank's monetary policy, such as reserve requirement ratio cuts, is implemented, the scale of cancellations and postponements may fall marginally. In terms of corporate financing costs, the asset shortage in the bond market has been alleviated, and institutional investors no longer need to excessively lower their standards to increase returns. Therefore, for medium and low-grade entities, if there are fluctuations in the liquidity of the money market, there is still a possibility that financing costs will rise.

▍Changes in cancellation of issuances in 2024.

Since 2024, there have been two peaks in the cancellation and postponement of issuances, in March and August 2024. In March 2024, the scale of credit bonds that were canceled was 72.42 billion yuan, the highest monthly scale since 2024; from August to October 2024, the total scale of credit bonds that were canceled and postponed was 115.558 billion yuan. For the cancellation and postponement of issuances in March 2024, unlike the past three peaks that occurred during bond market adjustments, the credit market interest rates were in a downward range in March, while the scale of cancellations and postponements increased marginally. This round of cancellations and postponements may be due to the asset shortage, where issuers expected the future credit market interest rates to be in a downward trend. In the case of not being tight on liquidity, delaying issuance can reduce financing costs and financial expenses. For the cancellation and postponement of issuances from August to October 2024, it is important to note that this peak did not occur in October when interest rates were at a higher level, but in August when credit interest rates staged a reversal. The relatively concentrated cancellation of issuances in the middle and late August may be due to the upward trend of credit bond interest rates throughout August, with a stronger willingness of entities to cancel issuances. In September and October, credit interest rates staged a downward trend, resulting in a relatively lower scale of cancellations and postponements.

Advertisement

▍Characteristics of this round of cancellation of issuances.

From the perspective of the main body's rating, in recent years, the proportion of medium and high-grade scales of AA+ and above has been increasing. In March and August 2024, the proportion of AAA-rated scales exceeded 70%, while the proportion of AAA-rated in the newly issued credit bonds of the month was 65%. Issuers no longer "passively" cancel issuances due to regulatory or quality factors in the past, but "actively" cancel according to external market factors and their levels. From the industry perspective, since 2017, the proportion of city investment and capital goods industries in the main bodies of each round of cancellation and postponement of issuances has been relatively high, with a total proportion of more than 50%, while other industries have fluctuated greatly. For the peaks in March and August 2024, the proportion of city investment bonds was below 20%, mainly in the capital goods industry; in September and October, the proportion of city investment bonds increased to more than 40%, higher than the 30% proportion of newly issued city investment bonds in newly issued credit bonds since 2024, and the proportion of medium and low-grade bonds also increased significantly, which may be due to the enhanced risk pricing of city investment credit after September, and the rise in the issuance interest rates of medium and low-grade city investment bonds.

▍Review of credit cancellation of issuances.

Since 2017, the credit market has experienced multiple peaks of cancellation and postponement of issuances, with different causes for each round, but all have a certain correlation with the trend of bond market interest rates. From 2017 to 2023, the credit bond market has experienced three peaks of credit cancellation and postponement of issuances, in March-April 2017, November-December 2020, and November 2022, with different causes for each round. In addition, when the scale of each round of cancellation and postponement of issuances increased, it was closely related to the issuer's judgment on the current interest rate trend: in March-April 2017, the central bank raised the OMO interest rate, and the economic data rebound impacted the bond market, leading to an increase in bond market interest rates and an increase in the scale of cancellations and postponements; in November-December 2020, the unexpected credit event reduced market risk appetite, and the difficulty and cost of credit financing increased, leading to an increase in the scale of cancellations and postponements; from November to December 2022, the redemption tide of financial management caused a sharp adjustment in the bond market, and many issuers chose to cancel and postpone issuances under market fluctuations.

▍Which enterprises' financing costs have increased?

Since November, the issuance interest rates of different grade entities have diverged, with the issuance interest rates of entities with grades AA(2) and above marginally declining, with a decline range of about 3-11bps, among which the decline range of high-grade entities is relatively large, while the issuance interest rates of AA- and A+ grade entities still maintain a growth trend, close to the level of issuance interest rates at the beginning of the year. From the industry level, after November, the average issuance interest rates of a few industries have increased, among which the average issuance interest rates of city investment, diversified finance, and business services have increased significantly, with an increase range of about 4-15bps. For city investment bonds, against the background of enhanced risk premium pricing and increased liquidity concerns since September, the secondary market valuation interest rates of medium and low-grade city investments have increased, leading to an increase in primary issuance interest rates and higher financing costs. For diversified finance, the entities with higher interest rates are mainly concentrated in the financial leasing industry, and the proportion of medium and low-grade entities issuing bonds has increased since November. For the business services industry, the increase in issuance interest rates is also due to the increase in the number of medium and low-grade entities issuing bonds.

▍Is the cancellation of issuances likely to reappear?

Against the background of debt resolution and the increase in local government bond supply, the central bank usually cooperates with loose monetary policy to maintain the stability of the money market, such as the central bank's 2 reserve requirement ratio cuts, 2 interest rate cuts, and 3 "double cuts" in 2015. With the start of a new round of debt resolution in 2024 and the acceleration of local government bond issuance, we believe that the central bank is more likely to cut the reserve requirement ratio again to maintain the stability of the money market. Since November, bond market interest rates have declined, and the scale of cancellations and postponements in the credit market has shown a marginal downward trend. Looking ahead, under the background of debt resolution, it is expected that the scale of local government bond issuance will be large, so there is still a possibility of fluctuations in credit interest rates. Combining the changes in the scale of credit cancellations and postponements since 2017, during periods of rising credit interest rates, the scale of cancellations and postponements tends to increase marginally. Therefore, under supply pressure, the scale of cancellations and postponements may rise marginally in the short term. If the central bank's loose monetary policy, such as reserve requirement ratio cuts, is implemented, the scale of cancellations and postponements may fall marginally. In terms of issuance interest rates, the issuance interest rates of newly issued credit bonds in November 2024 are close to the upper limit of issuance interest rates. Looking ahead, with the progress of local government bond issuance to replace hidden debts, the asset shortage in the bond market has been alleviated, and institutional investors no longer need to excessively lower their standards to increase returns. Therefore, for medium and low-grade entities, if there are fluctuations in the liquidity of the money market, there is still a possibility that financing costs will rise.