Courtesy of the weekend's AsianWallStreetJournal, I found some interesting numbers on Chinese corporate fundraising. In 2003, 4.3% of corporate fundraising came from the equity markets. That figure went up to 5.8% in 2004, then dropped to 3.8% in 2005, during which year the market reached its bottom. In 2006, not surprisingly given the strength of the Shanghai and Shenzhen stock markets, the equity markets rose in importance to account for 6.0% of total corporate fund raising. I expect this share will be larger in 2007, even though loan growth has been rapid.
The figure for bond markets shows even more variability. In 2003 bond markets accounted for just 1.1% of total corporate fundraising. In 2004 this rose to 1.3%, and then shot up to 7.3% in 2005 before declining again to 6.1% in 2006. Over this time the importance of banks as a source of corporate financing declined steadily from 94.6% in 2003 to 87.9% in 2006.
In an earlier posting I had assumed that bond and equity markets together accounted for about 5% of total fundraising over the past several years (my figures included government fundraising, which has a far greater bond component). It is hard to get very good figures because there is some evidence that many smaller and family-run companies borrow largely from the informal banking sector, whose loans are not included in these figures. Nonetheless I suspect my estimate no longer applies.
As I have noted many times (although some of this blog's readers don't necessarily agree), in my opinion the growth of alternatives to banks is an unambiguously good thing for China. The more moving parts there are to the financial system -- i.e. the more independent ways companies can finance themsleves -- the less susceptible the economy is to a financial shock that closes down one or more major sources of funding.
Chris Keogh, a good friend who heads capital markets activities at Gaohua Securities, the Goldman Sachs joint venture in China, was recently very upbeat about the growth of the bond markets in China during a lecture to my class. He guesses that bond markets will grow by about 30% or more a year. If we assume that loan growth slows to 15% (from its current 20% or more), then bonds and stocks might each account for about 10% of total corporate fundraising in about five years. This is good, but still not enough to give the sufficiently flexibility to the Chinese markets.
As an aside, Chris also said that the growth of the bond markets was being fueled by the fact that top-rated companies in China can borrow in the markets at anywhere from 1.5% to 3.5% cheaper than they can from banks. The AWSJ article also discused the big spread -- 2.5-3.5% according to them.
This suggests one of the dangers of the bond market to the banking system. If bond markets are so much more generous to top-rated companies than banks (whose lending rates are constrained by a minimum benchmark set by the government), one of the consequences of the growing bond markets may be a migration of the better credits out of the banking system. This happened in the US in the 1970s and 1980s and in Europe in the 1990s. It was not a very easy process for the US and European banks to learn how to adapt to a loss of their prime credits and I do not expect the process will be much easier for Chinese banks.
My understanding was that PRC banks do not have a ceiling on lending rates. There is a ceiling on the interest they can give depositors. Because their lending rates are not capped, but their borrowing rates are, this means that banks are making large amounts of money which are being used to improve their balance sheets.
I believe that it is a floor, not a ceiling, that constrains corporate lending by mainland banks. The lending rate set by the PBoC is a minimum lending rate.
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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Comments (3) for "Corporate fundraising in China"
- 9/3/2007 9:45 PM
December, 2007