* CP offers companies alternative funding channel
* Issue tenors to help establish market yield curve
* Investors view shorter tenors as less risky (Adds analysis)
SHANGHAI, Sept 30 (Reuters) - China plans to soon allow financial institutions to trade a new type of short-term commercial paper in its interbank market, two traders said on Thursday.
Analysts said the move was in line with the central bank’s goal to increase money market transparency as it gradually builds Shanghai into a world financial centre.
The new money market instrument offers a new fundraising tool to companies, reducing their reliance on bank lending, and in turn providing investors with new investment avenues.
“Corporate financing is being expanded by promoting the money market as a channel to raise funds,” said Frances Cheung, a strategist with Credit Agricole in Hong Kong.
Unlike existing short-term corporate debt traded in the market with issuance tenors of between six months and a year, the new money market instrument would have shorter issue tenors of up to 270 days, traders said.
The lack of short-term corporate debt issues has long been a hindrance to Chinese companies in managing short-term working capital needs, while preventing China from establishing a complete credible market yield curve across maturities.
Traders are likely to regard such short maturities on corporate issues, for example a tenor of 30 days, as much lower risk than buying currently traded corporate bills, mostly for one year, viewed as a more profitable but riskier bond.
The new paper would not fall under restrictions imposed on corporate debt, whereby the issuer can only issue debt worth up to 40 percent of its net assets, a trader familiar with the situation said.
“Without being subject to the restriction, pressure on corporate financing will ease greatly,” Cheung said. (Reporting by Shanghai Newsroom; Writing by Karen Yeung; Editing by Chris Lewis)