China is the opposite of other major economies when it comes to companies’ ability to raise money by issuing bonds.
China’s 4.2 trillion yuan ($666 billion) corporate bond market is just 9 percent of its gross domestic product. In the U.S., the $7.9 trillion in fixed-income securities is equal to more than half the size of economic output.
The government wants to change that, to give corporate bonds a bigger role in boosting growth and to divert risk from the state-owned banking system that provides 75 percent of the nation’s credit. A mature bond market also would provide funding for capital-hungry small businesses that have few options beyond the unregulated world of shadow banking, which officials are seeking to wrestle under control.
Guo Shuqing, the 56-year-old head of the China Securities Regulatory Commission, has taken steps to consolidate regulatory power over bonds since he became chairman seven months ago. He’s set up an office to study new products, and in May the CSRC, the equivalent of the U.S. Securities and Exchange Commission, said it’s considering introducing municipal bonds. In early June, Guo launched a plan to allow small and medium-sized companies to sell debt comparable to speculative-grade bonds in other market.
“International experience shows that overreliance on bank credit in a financial system can, under certain circumstances, lead to systemic risk,” Guo told the official People’s Daily newspaper in March, saying that the bond market, which provides 13 percent of China’s debt, “seriously” lags behind the demands of the real economy and needs to develop.
Three government agencies now split control over the bond market, including the CSRC, the National Development and Reform Commission and the central bank. The CSRC is pushing ahead with unifying all of the regulators’ separate bond-disclosure, credit-rating, investor-protection and entry standards, according to a May 31 statement on its website.
Guo’s unilateral power grab may create conflict, said Fraser Howie, Singapore-based managing director of CLSA Asia- Pacific Markets who co-authored the book “Red Capitalism” on China’s financial system.
“Clearly there are others who are going to want to have a say when it comes to the fixed-income world,” Howie said. “What he needs to do is pick fights he can win.”
If anyone can, it may be Guo. As head of the State Administration of Foreign Exchange in 2001-2005, he pushed through reforms by forging relationships between departments and building support, according to Hong Weizhi, a former spokesman for SAFE who worked with the chief regulator.
“Maybe only he can bring things together, only he can persuade relevant departments,” Hong said. “You need not worry when you hand a job to him. He attaches great importance to coordination and always puts state interests before his own agency’s.”
In April, the three bond-market regulators held their first meeting to coordinate policy on corporate securities, according to the central bank’s website.
“In the long run there should be a unified supervision of this market,” said Wang Ge, an executive director in debt capital markets at Goldman Gaohua Securities Co., Goldman Sachs Group Inc.’s joint venture in China. “Investors are eager to invest in corporate bonds, but the market is not sophisticated enough to allow them to hedge credit risk.”
Guo’s moves would change that. The introduction of junk bonds could allow China to have its first default, which would then allow the market to price the risk of a company going bankrupt and instill confidence in the market. So far, local governments or banks have bailed out any company that risked defaulting on its publicly traded bonds.
The debut sale went ahead as a private placement on June 8, with a 50-million-yuan offering by Suzhou Huadong Coating Glass Co., based in the eastern province of Jiangsu, according to a release on the Shanghai Stock Exchange.
“For a mature bond market we should allow some firms to go bust,” said John Sun, managing director at Citic Securities International in Hong Kong. “The high-yield issuers will be small companies, so the impact on the whole market will be small, but psychologically it can impact the market sentiment because it’s never happened before.”
Although foreign banks, through joint ventures, can trade in bonds and underwrite them on the CSRC-regulated bond market via the two stock exchanges in Shanghai and Shenzhen, they mostly remain shut out of underwriting on the interbank market, which is 20 times larger and closed to individual investors.
Only HSBC Holdings Plc has won approval to underwrite non- financial debt on the interbank bond market, and has yet to lead manage any sales. The London-based bank is the top underwriter in Hong Kong of so-called Dim Sum bonds, denominated in China’s currency and sold offshore, according to data compiled by Bloomberg. HSBC declined to comment on Guo’s reforms or potential for expansion for foreigners.
“It’s awfully hard to see a foreign bank getting in, in a big way, in the early stages because the large local institutions are going to have to dominate to ensure that it works,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. “A Chinese corporate would feel they have a better chance of success with a big local institution. That’s the law of the jungle.”
Foreign banks do stand to profit from the expansion of the domestic bond market as more Chinese companies are also allowed to sell Dim Sum bonds in Hong Kong. In addition to HSBC, Standard Chartered Plc, also London-based, along with BNP Paribas SA of France and Deutsche Bank AG of Germany have been the top underwriters of 227 billion yuan worth of debt since Baosteel Group Corp. became the first mainland non-financial company to sell yuan bonds in Hong Kong in November. Another four offerings are in the pipeline after being approved by the NDRC in April.
“European banks in China welcome the efforts made so far by the regulators to establish a strong liquid domestic bond market,” Dirk Moens, secretary general of the European Union Chamber of Commerce in China, said in a statement that urged China to “clarify the approval process and grant faster access to those qualifi
