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Corporate bonds set to take off in China

(Xinhua)
Updated: 2007-07-02 08:31

China's corporate bond market, which has struggled compared with stocks and treasury bonds, is expected to get a lift as regulators finish soliciting opinions on a draft regulation of its issuance.

Corporate bonds are rare in China, as only a handful of large state-owned enterprises get approval from the National Development and Reform Commission (NDRC) to issue such bonds.

The price and the amount of bonds to be issued are decided by the commission, and the commission also requires the state commercial banks to underwrite the bonds.

In this case, the country, not the companies, bear the risks, and such bonds should be more appropriately called "enterprise bonds" as opposed to real corporate bonds made with companies bearing the risks in developed countries.

Just 283.1 billion yuan of corporate bonds were issued by the end of last year, accounting for only 1.35 percent of GDP, far lower than the 40 percent in the United States and 17 percent in the Republic of Korea.

The draft regulation is seen as a landmark move towards the take-off of corporate bonds to allow more Chinese companies access to bond issuance in a bid to boost direct financing of domestic companies.

According to the draft, the China Securities Regulatory Commission (CSRC) will be charged with supervision of corporate bonds, while the NDRC remains in control of "enterprise bonds" issued by state-owned enterprises.

The CSRC will be able to approve the issuance of bonds with maturity times of longer than a year by Chinese listed companies.

The draft says companies listed overseas as well as on the Shanghai and Shenzhen exchanges will be able to issue such bonds.

The CSRC will not approve every issue on an individual basis, but laid out clear criteria for bond issues in the draft rule.

It said the prices and interest rates would be set by the market and require bonds to be backed by the assets of the issuing company. A company's total outstanding corporate bonds are capped at 40 percent of its net assets.

Analysts said the commission would first encourage companies with net assets of one billion to 1.5 billion yuan or more to issue the bonds without bank guarantees.

The rule also said the corporate bonds would be registered with the China Securities Depository and Clearing Co. Ltd. to open the trading of corporate bonds at stock exchanges, instead of the inter-bank market.

Shang Fulin, chairman of the CSRC, said in January that the development of the corporate bond market would be the commission's priority in 2007.

"Corporate bonds would provide more channels for investment and provide a new outlet for excess liquidity in the capital market, and it would also encourage companies to improve management and performance," said Yi Xianrong, an economist with the Chinese Academy of Social Sciences.

Yang Jian, researcher with the People's University of China, also welcomed corporate bonds, describing them as one of the best tools in capital allocation as they bore an interest rate higher than the national debt bonds, but were less risky than stocks.

Chinese companies welcomed the launch of corporate bonds, allowing them a new channel of financing, but they await further regulations on corporate bond issues to be able to weigh the risks against bank loans and stock financing.

"We surely welcome the issuance of corporate bonds," said Xu Junmin, secretary of board of directors of Shanghai Airlines, adding the company might issue corporate when conditions are ripe.

Corporate bonds might cut financing costs, but their issue would be decided after a comprehensive evaluation of the company's performance and financial status, said Yangjun, with Sichuan Changhong Electric Company Limited.

Related readings:  Corporate bond issuance may hit 100b yuan this year  New division set up to supervise listed firms  Massive bond sale approved Special Coverages: Markets Watch

A coal company in Inner Mongolia said corporate bonds could help high-yielding companies to lower financing costs, and it hoped the approval process would be no longer than three months. The approval from the NDRC usually takes a year to 18 months to complete.

Analysts believed there would be huge demand for companies to issue corporate bonds as a majority, some say 90 percent, of corporate financing still comes from bank loans.

However, questions were raised about the prospective bond buyers.

It would be difficult for both individual and institutional investors to accept corporate bonds, compared with mutual funds and stocks, said Yang Yongguang, a researcher with Seal and Fixed-income Securities Research Center.

"Individual investors would not buy the corporate bonds," echoed a business insider with China Life Insurance Assets Management Company.

However, he said insurance companies might be willing to invest in corporate bonds if there is a big interest rate gap. Insurance companies usually invest their capital in the less riskier national debts.

He also expressed concern over the nation's imperfect credit rating and tracking system, and said it could undermine the acceptance of corporate bonds.

A report from the U.S. Federal Reserve on China's corporate bonds also urged the country to develop financial institutions willing to hold corporate bonds such as insurance companies, pension funds, and investment funds.