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China’s coronavirus response: capital markets take centre stage

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By Addison Gong
14 Apr 2020

China’s government has won plaudits for its response to the Covid-19 coronavirus. That praise should extend to its capital markets.

It has been over three months since the first cases of ‘pneumonia of an unknown cause’ were reported in mainland China. Now officially known as Covid-19, the pandemic has infected over 2m people globally and killed nearly 120,000.

The human cost of this tragedy should not be reduced merely to numbers, nor should the focus only be on the impact of the virus on financial markets. But for corporations hoping to raise money ─ including those attempting to fight the spread of the virus ─ access to capital is essential. China has done an admirable job in keeping its markets open.

The A-share market saw a 65% rise in the number of new listings over the first three months of 2020 compared to a year ago. These 51 IPOs raised Rmb78.6bn ($11.15bn), more than twice the volume for the first quarter last year. The Shanghai Stock Exchange has overtaken Hong Kong and Nasdaq as the most popular listing destination globally.

In the bond market, there was about Rmb12tr of new issuance between January and March, 14% higher than what was seen over the same period in 2019, shows data from the central bank. Corporate bond issuance topped Rmb3tr, with net new financing of over Rmb1.7tr, both of which are at historic highs. Privately-owned enterprises, the most impacted by the pandemic, sold 50% more bonds versus the same quarter in 2019. Net new financing of Rmb93bn was at a three-year peak.

The frenetic pace of new issuance is down, at least in part, to the country’s regulators.

The China Securities Regulatory Commission has made the IPO registration process shorter and easier for listing hopefuls linked closely to Covid-19 – more specifically, those located or registered in areas that have been heavily influenced by Covid-19 or those in industries related to the prevention and control of the pandemic. As a result, it has approved 20% more IPOs than it did during the same period last year.

A similar story emerges in the bond market. Since the beginning of February, China has guided issuers to sell bonds with a coronavirus label, some of the proceeds from which must be used to fight the pandemic. The trend started with the policy banks, hospital builders and pharmaceuticals companies, but others including commercial airlines, automobile manufacturers, food suppliers, local government financing vehicles and securities houses soon caught up. By March 31, issuers including a range of high yield and investment grade credits, had raised close to Rmb332bn from 424 such deals, according to Wind.

The loan market has also been busy. China encouraged banks to extend cheap loans to smaller, private companies. After fiscal subsidies, the interest on these loans averaged just 1.29%, official data showed. The buoyant bond market has also helped the three Chinese policy banks ramp up their lending programmes for the manufacturing industry and smaller companies. In March alone, the trio collectively raised nearly Rmb490bn from both virus-linked and plain vanilla bonds.

The response of China’s capital markets to this problem is not perfect. For example, to encourage the use of the bond market for financing, China only requires a minimum of 10% of the proceeds from each virus-labelled bond to support Covid-19 related businesses. The low bar of selling such deals has raised questions about how many of the companies have genuine needs to do so, with some potentially exploiting the label to take out old debt at lower costs.

China also had the benefit of reasonably obedient local stakeholders. State-owned banks and funds offer a reliable source of demand for new deals, making it much easier for equity and debt markets to keep ticking.

There are signs of life elsewhere in Asia, with the $6bn offshore bond from Petronas this week a dazzling example of the potential funding available in the region’s capital markets. But regulators and capital market bankers in China deserve praise for ensuring that capital markets in the region’s biggest and most important economy have remained firmly open in a time of crisis.

By Addison Gong
14 Apr 2020