Corporate bonds are set to shine in China
by Richard McGregor
Published: February 12 2004
Financial Times
China's credit explosion, which has mainly been fuelled by lending by the
country's banks, could be poised to switch focus to the nascent market for
corporate bonds.
The State Council, China's cabinet, has issued an official policy paper
promising to support the reform and expansion of China's capital markets,
including corporate bonds.
On one reading, the paper consists of little more than a statement of good
intent, but within China, the document has provided a long-awaited show of
political support for the development of capital markets, including domestic
bonds.
"I think there is going to be an explosion in the corporate bond market,"
said the head of fixed-income desk of a global investment bank, based in
Hong Kong, who asked not to be named.
Corporate bonds have already grown relatively rapidly in China, with the
total of domestic Renminbi issuances increasing sixfold between 2000 and
2003, albeit from a small base.
In 2000, Rmb8.9bn worth of bonds were issued; in 2001, Rmb24.5bn; in 2002,
Rmb32.5bn and last year, Rmb45.2bn.
These numbers, however, need to be taken with a grain of salt, say Chinese
analysts, as they also count municipal bonds.
"Corporate bonds in China are very different from those in western countries
- issuers are very often not companies with limited liabilities," said Zhou
Li, the manager of fixed-income securities at Guotai Jun'an Securities in
Shanghai.
But even with this caveat, there are a host of reasons for total issuance to
continue to rise this year on top of central government's renewed policy
support.
The banks themselves would like to diversify their business away from
straight lending, and get involved in underwriting bonds.
The growth of institutional investors, including insurance companies, means
there is a larger appetite for fixed-income debt, and local companies
themselves also see an advantage in mixing bonds with other forms of credit.
"More and more CFOs [chief financial officers] in China have got smarter in
looking at the capital structure of their companies," said the Hong
Kong-based analyst.
Still, even as some of the impediments to growth are being removed, the
political and bureaucratic obstacles remain formidable to a quick take-off
in the bond market.
The hydra-headed approval process remains cumbersome, with the potential
involvement of four different top-level agencies required. All bonds
issuances must be approved by the National Development and Reform Commission
(NDRC), the chief economic policy body, in Beijing; and the People's Bank of
China, the central bank, sets the interest rate.
For listed companies, they need extra approval from the China Securities
Regulatory Commission, the market watchdog; and the China Banking Regulatory
Commission, which oversees financial institutions, also needs to sign off.
The most important body is the NDRC, which, like most central government
bodies, has deliberately moved slowly in the bond market for fear of the
fall-out from any defaults.
Their prime responsibility, the commission's officials have often said, is
the security of the bondholders, not the development of the capital markets.
The NDRC has been hampered by the lack of experienced credit rating agencies
in China, the assessments of which carry little weight in the market. Apart
from Fitch Ratings, which has struggled, the most credible foreign ratings
agencies, like Moody's Investors Service and Standard & Poor's, have not
been licensed to operate in China.
"The risk issue has hampered the development of the market," said Mr Zhou.
While not as bullish on the development of the market as some, Mr Zhou said
it would get an extra boost through the government's encouragement of a
market in the trading of bonds.
Three foreign banks - Morgan Stanley, BNP Paribas and CLSA - have formed
joint ventures in China which will allow them to participate in the market,
and many others, including Goldman Sachs and Citigroup, are exploring ways
to join them.
"In five years, I think the corporate bond market will be the biggest in
Asia outside of Japan," said the Hong Kong-based analyst, "and eventually,
it will surpass that as well". |
