Listed Chinese companies are lining up in their hundreds to sell corporate bonds and pay off bank loans after the securities regulator issued formal rules governing the nascent sector.The regulations, first circulated in draft form two months ago, greatly reduce the formal requirements for listed Chinese companies to sell bonds for trade on the Shenzhen and Shanghai stock exchanges.
A quota system that kept annual corporate bond issuance below Rmb100bn ($13.2bn) last year has been abolished and listed companies are now permitted to repay bank debt with bond proceeds for the first time. Companies with high levels of debt, particularly in the power, property and transport infrastructure industries are expected to be the first to sell bonds under the new regime, with China Yangtze power reported to be preparing an Rmb8bn issue.
But bonds will appeal to all corporations in a country where bank lending rates are set artificially high by the central bank to ensure profits and stability in the state-owned banking sector. Interest rates in China’s bond market are generally 2-3 percentage points lower than bank loans.
“The regulators want to gradually move to the US model where a large amount of credit risk is moved from the bank balance sheets to the capital markets,” said Zhang Zhiming, director of asset allocation research at HSBC in Hong Kong. “There is likely to be huge interest from listed companies because, even if they don’t need additional funding, they will still be attracted to save money by switching from bank loans into bonds.”
The reforms were made possible by a decision this year to shift control of corporate bonds from the National Development and Reform Commission, the country’s conservative central planning agency, to the more liberal market-oriented China Securities Regulatory Commission.State-owned banks, which account for more than 90 per cent of corporate financing, are not the only sector that will be affected by the move.
In the last seven months of 2005, Rmb142bn of short-term corporate paper with maturities of less than one year was sold in the inter-bank market. Total issuance hit Rmb292bn last year, and Rmb180bn so far this year.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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October, 2007
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