- Here's a little-known fact: Chinese companies now issue more corporate debt than their counterparts in Japan, making the yuan-denominated bond market the world's No. 3, after those for dollars and euros. In the first five months of 2009, mainland companies sold $82 billion worth of debt, vs. $51 billion for the Japanese. "The growth in issuance has been phenomenal," says Liao Qiang, credit analyst at Standard & Poor's ( (MHP)
) in Beijing.
Bond sales in China started to come to life when the mainland's equity markets headed south in late 2007. As sellers parked their stock proceeds in deposit accounts, banks found themselves flush with money they couldn't lend because of government limits on loans. To give banks somewhere to put their excess liquidity, regulators in April 2008 streamlined rules on bonds.
Before the changes, corporate bonds had to be listed on the stock exchange. That required approval by exchange regulators, which was costly, time-consuming, and subject to political whims. So most issues were enterprise bonds—money raised by state-owned companies to finance big infrastructure projects such as the Three Gorges Dam or new railways. These all had state guarantees and offered identical yields.
The new rules make things simpler. While all issues require a credit rating, they no longer need to be traded on the exchange. The market got an added jolt last September when Beijing halted new domestic stock offerings as Shanghai shares tumbled. That forced companies to look elsewhere for capital. And with interest rates down worldwide, bonds have become yet more appealing. In the first five months of 2009, corporate bonds accounted for 22% of all debt issued in China, including government debt, vs. 3% in 2007.
Corporate bonds will be crucial to Beijing's efforts to make the yuan a global currency. For that to happen, the mainland's capital markets need to be far more sophisticated and better integrated into the international financial system than they are today. "The government is pushing to make financial markets more broad-based and mature, and without debt you cannot say that is complete," says Frank Gong, chief China economist at JPMorgan Chase ( (JPM)
More than 100 companies have issued bonds. The largest offering to date came in May when Agricultural Bank of China raised $7.3 billion, priced to yield 3.3% for five years, vs. 2.4% on government bonds. Billions more are in the pipeline, including issues by International Commerce Bank of China, Bank of Communications, and Bank of China.
"STILL QUITE THIN"
But for cash-starved private companies the market is still hard to penetrate. The minimum flotation is $141 million, and issuers must have a AAA or AA+ rating from one of the five domestic or joint-venture ratings agencies that have been licensed. That precludes all but a handful of private companies from participating, so more than 80% of bond issuers are state-linked companies. And because most purchasers of corporate debt hold it until maturity, bond trading after issuance is "still quite thin," says Frances Cheung, fixed income strategist with Standard Chartered Bank in Hong Kong.
The bond market could get a further boost once Beijing opens up the market in "panda bonds"—yuan-denominated issues by foreigners. So far, the International Finance Corp. and Asian Development Bank are the only organizations that have issued panda bonds, although HSBC ( (HBC)
) and Bank of East Asia have been approved to sell them in Hong Kong. And later this year locally incorporated subsidiaries of foreign companies may be allowed to issue panda bonds on the mainland. Among the first will likely be London-based Standard Chartered, which aims to raise some $500 million to shore up its mainland balance sheet. Although stocks are climbing and IPOs are set to resume, "we'll still see strong demand" for bonds, says Chris Zhou, director of debt capital markets at UBS Securities in Beijing. "The bond market is a relatively easy and cost effective way to get money."