Yields on 10-year Chinese treasury bonds fell 10 basis points (bps) on Wednesday at the open as investors sought the safety of government debt.

Other debt perceived as having strong government backing has also performed well in recent days.

Yields on 5-year policy bank bonds and equal tenor debt from local government financing vehicles (LGFVs) are both down around 20 bps since the end of June.

Chinese stock markets have slumped 30 percent since mid-June, despite increasingly aggressive government moves to stabilise markets. [.SS]

Nonetheless, there are fewer signs of corporate debt benefiting. Chinese companies, like retail investors, have until recently been plowing money into the stock market, leaving them exposed to the market crash.

Yields on 5-year AAA rated corporate debt have only fallen seven bps since the beginning of July, compared with double- digit falls for policy bank and LGFV debt.

“Chinese securities companies themselves have a lot of financial asset holdings and when there is a sell-off there will be a big impact on their balance sheets," said Hong Kong based Kingston Lam, Hong Kong-based credit analyst with Credit Agricole.

"If they are using up cash to buy back shares, it will be a further negative,” said Lam.

PERFECT STORM

This could be the perfect opportunity for non-investment grade issuers as high yield bonds bear the brunt of the sell-off in offshore credit markets on Wednesday. For instance, Agile Property bonds due 2020 are down 3 points at 96/97.5 cents on the dollar and the rise in yields would mean the company would have to pay a higher coupon at its next issue.

And, falling on-shore yields -- particularly if the central bank intervenes more aggressively -- may encourage some issuers that traditionally tap global markets to look homewards.

For instance, on Tuesday Evergrande Real Estate Group (>> Evergrande Real Estate Group Limited) raised 15 billion yuan ($2.42 billion) in its second visit to the domestic bond market in less than a month.

   "Select Chinese high-yield issuers may be able to refinance expensive offshore debt with far more affordable onshore borrowings," said Herman van den Wall Bake, Deutsche Bank’s Head of Fixed Income Capital Markets, Asia ex-Japan.

"The knock-on effect could be a drop in supply of offshore high yield bond issues. For an issuer it makes perfect corporate finance sense to replace a 12 percent coupon with a 6 percent coupon, even if the tenor is a few years shorter."

Similar announcements have also been made by China Vanke <2202.HK>, Guangzhou R&F (>> Guangzhou R&F Properties Co Ltd) Longfor Properties (>> Longfor Properties Co. Ltd.) and Times Property (>> Times Property Holdings Ltd) which have all declared in the past month plans to sell domestic shares.

Resurgent interest in official debt could also help with the massive pile of local government debt which Chinese provinces need to refinance this year, and which has kept yields on longer-dated Chinese treasuries elevated this year.

(Reporting by Umesh Desai and Nathaniel Taplin; Editing by Kim Coghill)