The introduction of commercial paper to China's capital markets two years ago caused quite a stir among corporations looking for new ways to raise funds. Suddenly here was a one-year debt instrument that could be issued without any of the administrative hassles that were keeping corporate bonds in the doldrums.
Last year there were 242 commercial paper issues which raised a total of US$39.3 billion. By comparison, corporate bonds - of which there were 49 issues - raised US$13.4 billion. The bulk of the investors are commercial banks, which are largely restricted from buying other forms of corporate debt.
It just so happened that the commercial paper market was run by the People's Bank of China (PBOC) rather than the National Development and Reform Commission (NDRC), which until then had a stranglehold on all debt-related products.
"The PBOC wanted to be more open and develop the capital markets more quickly than everyone else," said Charlie Ye, head of fixed income at UBS Securities in Beijing. "It opted for commercial paper because it is valid for less than a year and therefore didn't fall within the NDRC's jurisdiction."
Ye is concerned that the PBOC was perhaps a little too laissez-faire in its approach, resulting in a lot of high-yield commercial paper being issued. He believes this represents a lot of unnecessary risk and, if several issuers started struggling to repay their debts, could send the market into freefall.
However, there is no denying that this was skillful piece of innovation by the PBOC that may even have led to the NDRC losing control of corporate bonds issued by listed companies to the more reformist China Securities Regulatory Commission (CSRC).
"It was the success of commercial paper that actually gave the regulators the idea of expanding the corporate bond market," said Joseph Hu, China country head at ratings agency Standard & Poor's. "If increasing access to capital markets through commercial paper can work so well, why can't you do the same for longer-term bonds?"
The changes don't stop there. Central to the PBOC's approach to commercial paper was ending the quota system employed by the NDRC, which limited how many bonds could be issued each year. When the CSRC took over the running of listed firms' bonds, it did the same. And now the NDRC itself, which has retained control of bonds issued by non-listed firms, has also scrapped quotas.