Cash-strapped small to medium-size Chinese enterprises will be able to tap into the junk-bond market by the end of the month or early March as China seeks diversify its sources of funding. This is perceived to be a general positive development for the rapidly growing bond market, but some analysts seem doubtful.
“This provides more choice for investors and also opens another financial channel for small companies,” said Frances Cheung, a Hong Kong-based credit strategist at Credit Agricole to Asiamoney PLUS in a telephone interview yesterday (February 7). “I think the [financing] need for small companies have triggered for the launch of this market soon because locally it seems more companies are facing more difficulty in securing bank loans.”
“It certainly will broaden the fund raising capacity for the debt capital market and also offer more options to local investors,” added Ju Wang, a credit strategist at Barclays Capital to Asiamoney PLUS in an email reply to questions. “I think the liberalisation of financial market is the unavoidable task on China’s calendar. [This is] to reduce reliance over bank lending and increase access to capital for riskier borrowers.”
The China Securities Regulatory Commission (CSRC) has met with executives at the country’s key brokerage houses and informed them it wants a market for high-yield bonds, according to China Business News, a Shanghai-based daily.
Zhou Ruanfan, a senior vice president from Pengyuan Credit Rating, was quoted by the newspaper as saying the CSRC had drafted rules for the issuance of junk bonds, which offer higher yields and more risk than investment-grade corporate bonds.
Small, unlisted firms and other qualified entities will be allowed to sell the bonds under a market-based registration system, which means regulators won't examine and approve every issue, Zhou was quoted as saying.
An analyst highlighted that these rules could, however, raise concerns for the type of debt that will be approved and issued under junk-bond status. He remains sceptical and believes that a supply of junk bonds will not meet investor needs.
“It’s very difficult for anyone to issue in this kind of market,” said Zhi Ming Zhang, a Hong Kong-based head of China research at HSBC to Asiamoney in a telephone interview yesterday. “Insurance companies are not allowed to buy junk-bonds. Banks wouldn’t buy it because the size is too small and there is a lack of liquidity. So what are left are fund houses and high net worth individuals – if these people are risk takers, they will buy equities instead.”
“I think the proposed junk bond market would not have much impact on China's overall bond landscape,” said another debt-capital market analyst at a local bank. “This is because there is already ample supply of high-yield bonds in the market and investors have limited appetite for junk bonds under today's market uncertainty.”
Of the Rmb2.2 trillion (US$349 billion) in corporate debt sold in 2011, only Rmb124.1 billion or 5.6%, was issued under the supervision of the CSRC, according to central bank statistics.