China Money: Corporate debt issuance set to surge

Posted by Admin
Wed Aug 27 01:00:33 PDT 2008

By Karen Yeung

SHANGHAI, Aug 27 (Reuters) - China's economic slowdown may be good news for its corporate debt market, where issuance is set to surge in the second half of this year as authorities try to support the economy by making debt financing easier.

The expected flood of new corporate debt threatens to widen bond spreads. But the impact of increased supply on yields may be offset by official efforts to boost investors' demand for bonds.

"The direction of policy is to increase corporate bill and bond issuance, even by smaller companies, to support economic growth," says Shi Lei, analyst at Bank of China.

China's corporate bond market has long been stifled by red tape, which has made obtaining regulatory approval to issue bonds difficult and time-consuming, and by poor coordination among the various regulators responsible for issuance.

These problems have limited both the volume of issuance and the ability of institutional investors to buy bonds on offer.

But a slowing economy now seems to be prompting regulators to solve the problems. Issuance of corporate bonds approved by the National Development and Reform Commission (NDRC), which oversees issues by non-listed firms, jumped to 31 billion yuan ($4.5 billion) in July from 600 million in June and 500 million in May.

Bond issuance by listed companies, overseen by the China Securities Regulatory Commission (CSRC), is smaller but also appears to be rising. Real estate giant Vanke, which originally announced a sale of up to 5.9 billion yuan of bonds in August last year, said on Wednesday it had obtained approval.

The market believes the CSRC will soon approve issuance by PetroChina, which said in June that it planned to sell up to 60 billion yuan of bonds in one or more tranches, the largest bond plan by a listed Chinese firm.

FINANCING DIFFICULTIES

The government thinks improving access to financing is key to helping companies ride out the economic slowdown.

Financing difficulties this year have driven some firms, especially smaller ones, into an unregulated underground loan market where they are forced to pay rates of 20 percent or more, at least double bank loan rates. This lifts the risk of defaults.

Shi calculates that in order to support gross domestic product growth at 9.5-10.0 percent this year, China needs to expand corporate financing in the second half of the year by 400 billion yuan beyond the authorities' original plan.

Some of this additional funding will come from bank loans; this month the central bank expanded quotas for growth in bank lending, which Shi estimates will add 200 billion yuan. Analysts believe it may lower banks' reserve ratios late this year.

But relying entirely on bank loans would expose banks to a jump in credit risk. So with a stock market crash limiting room for equity financing, corporate bonds are playing a bigger role.

Early this year the NDRC streamlined its approval process for corporate bond issuance, abolishing a system based on quotas and lengthy case-by-case reviews.

More streamlining may be on the way. The official Securities Times reported last week that authorities might revise rules to make it easier for small companies to issue short-term corporate bills on a large scale from late August or early September.

Bigger corporate bond supply may stimulate secondary market trading, giving institutional investors an alternative to low-yielding government bonds and central bank bills, which now account for the vast bulk of China's debt market.

"Corporate bonds currently have very poor liquidity," says Qu Qing, analyst at Shenyin & Wanguo Securities.

"But interest in corporate bonds will pick up as supply is expected to rise sharply this year, so corporate bond trading will become more linked to other parts of the debt market."

SPREADS

The prospect of more supply has started to widen corporate bond spreads. The five-year spread between top-rated corporate bonds and government bonds widened to 125 basis points on Wednesday from a six-month low of 105 bps in July, according to Reuters Reference Rates.

History suggests there's room for more widening; the spread hit peaks for this year of 138-140 bps in February and April.

But many traders think authorities will also make regulatory changes to boost demand for corporate bonds. For example, barriers between the interbank and stock exchange bond markets may be removed, which authorities have said is a long-term goal.

"This would permit commercial banks to buy stock exchange-listed corporate bonds, perhaps indirectly through trusts, which would be a big step forward," said an analyst at a mid-sized bank in Guangzhou.

A ban on insurers buying unguaranteed corporate bonds, which has been another big obstacle to expansion of the market, could also be lifted, traders believe. ($1 = 6.84 yuan)

(Editing by Andrew Torchia)

Provided by Reuters

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