China Rolls out It's Commercial Paper Market.
Nascent Chinese Market Proves Popular Source of Cheaper Funds
By JAMES T. AREDDY
Staff Reporter of THE WALL STREET JOURNAL
September 29, 2005
SHANGHAI -- Chinese companies have been cutting borrowing costs this year by tapping a new source of funding: commercial paper.
Since Beijing gave companies the green light to issue commercial paper, or financing bills -- short-term obligations used to obtain cash -- in the first quarter of this year, dozens have outlined fund-raising plans. The 21 companies that have sold such instruments have, on average, raised the equivalent of $304 million each, according to data from the China Government Securities Depository Trust & Clearing Co.
This latest source of financing is a welcome development for cash-hungry companies such as Air China and Aluminum Corp. of China at a time when regulators aren't allowing stock-market fund raising. Jinan Iron & Steel Group launched a one billion yuan, or $124 million, sale of 2.95% one-year bills yesterday.
Establishment of this financing channel marks a step forward in the government's effort to launch a true corporate debt market and wean the economy off what many analysts view as an unhealthy reliance on banks; currently, banks claim 95% of loans and other financial assets in China. The People's Bank of China, the country's central bank, which regulates bill issuance, said in August that the instruments are designed to make borrowing more transparent and distribute default risks more widely than bank loans do.
Yet the enthusiastic embrace of the instruments by blue-chip companies means banks may be lending less to their best customers. For now, the totals being raised are small compared with overall bank lending of $2 trillion last year in China, and there are indications that many companies are using funds raised from bill issues to supplement, rather than to replace, bank borrowings. A big question mark is how productively the money is being deployed and whether cash-strapped smaller companies will be allowed to launch funding programs.
One big incentive for Chinese companies to sell commercial paper is the low interest charge. At about 2.6% for recent 365-day issues, the rate is about half that imposed by banks on regular working-capital loans. Banks currently charge about 4.7% for one-year loans, including a 10% discount to the benchmark one-year lending rate.
"Compared to the bank-lending rate, it is cost-saving," says Tang Jun, a bond analyst at Citic Securities in Beijing. "Moreover, unlike with a [stock offer] or corporate bond, companies can get the funding they need quickly. It saves a lot of time and energy."
Ironically, banks play a vital role in the market -- as buyers. The banks are willing to cannibalize their own basic business of lending money by accepting low-yielding instruments because they have limited choice. Huge amounts of cash are floating around in China's economy and investment alternatives are limited.
Bills benefit banks in one way. By holding the paper, rather than a straight loan, a single bank isn't on the hook for the whole outlay -- an important distinction in an economy long plagued by deadbeat borrowers. Plus, banks can trade them like any other bond.
In markets such as the U.S., commercial paper is a common stopgap financing tool. It most often is used to complete a transaction like a merger or to help get a company through cash-tight periods, such as when inventory builds up ahead of the Christmas season. Most paper in the U.S. matures in about 30 days, according to the U.S. Federal Reserve.
Corporate issuers in China have done little to outline how they might use the money, raising the possibility that bills will be used as bank lending is now, for basic working capital. Technically
, companies must renew their commercial paper programs each year rather than roll over individual issues. The possible introduction of commercial paper with longer maturities, such as two-year paper, could further undermine bank lending.
Even in the industry's infancy in China, some analysts see signs that the commercial paper market could become a basic source of credit for many companies. It could increasingly substitute for bank loans. Aside from the interest rate, key terms are similar: Most corporate lending by Chinese banks also is done on a one-year basis and then rolled over into a new loan after 12 months.
Bills also appeal to corporate issuers because fund raising in the stock market has been virtually closed off for the past year. Rather than allow companies to do rights issues or sell new stock, regulators have encouraged publicly traded companies to concentrate on streamlining their shareholding structures and make nontradable portions of stock tradable.
China's biggest companies have been especially active with bill offerings. A number of brokerage house also have issued bills.
China Petroleum & Chemical, the state oil behemoth known as Sinopec, last week said its shareholders approved a one-year program to ultimately raise as much as 10% of the value of its net assets in the form of bills. Its 2004 net assets were $24 billion.
"Presently, our company is filling capital shortages mainly through bank loans. The bills expand the capital-raising channels for the company," Sinopec said in its offering prospectus.
Another large offer already has hit the market from China Unicom, a mobile phone company whose shares are traded in Hong Kong. Unicom in July raised the equivalent of $1.25 billion in bills, mostly in one-year securities. That figure compares with its bank loans outstanding of $3.38 billion at the end of 2004, according to its annual report.
Taking the lead in underwriting the Unicom offer was China Everbright Bank. In exchange for guaranteeing to find a market for the paper, the bank earned fees from the successful transactions.
China Everbright also is a straight lender to Unicom, although an increasingly smaller one, with only $5 million of outstanding loans to the telecommunications company at the end of last year. At the end of 2002, China Everbright had around $19 million in loans extended to Unicom.
--Ellen Zhu contributed to this article
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