China may launch a junk-bond market as early as this month or next, local media said on Monday, a move that could expand access to credit for small, private firms now largely shut out of China's state-dominated financial system. The China Securities Regulatory Commission (CSRC) has met with executives at the country's key brokerage houses and told them it wants a market for high-yield bonds, the China Business News, a Shanghai-based daily, cited attendees at the meeting as saying.
Zhou Ruanfan, a senior vice president from the Pengyuan Credit Rating Co Ltd, was quoted by the newspaper as saying that the CSRC had drafted rules for the 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. "The rules can be implemented as quickly as in February," Zhou was quoted as saying.
It cited another brokerage executive as saying the annual session of parliament in March would be a good window of opportunity for the launch, while others at the meeting said the launch date could be later, the newspaper reported.
The high-yield bond market will support China's economic growth by providing a much-needed source of financing to smaller firms, according to Yin Jianfeng, a deputy director with the Institute of Finance and Banking of the Chinese Academy of Social Sciences. "Rating agencies will gain, underwriters will gain, companies will gain, and investors may gain as well," said Yin. But Yin added the current situation, in which large, state-owned companies dominate debt issuance, will persist in the short term. "It would be unrealistic to expect the junk-bond market to make a fundamental change in China's bond market structure," Yin said.
RATINGS AGENCIES IN FOCUS
China's debt market remains fragmented and issuance is largely restricted to the finance ministry, policy banks, state-owned enterprises and, lately, financing vehicles backed by local governments. The new report suggests that under the leadership of its new chairman, Guo Shuqing, the CSRC may be more supportive of capital market reform than under Guo's predecessor, Shang Fulin. Guo has said in public speeches that he would encourage the development of high-yield bonds in China.
The bulk of debt issuance by firms now occurs through the commercial paper (CP) market, with approvals granted by the National Association of Financial Market Institutional Investors (NAFMII), an industry body under the central bank. The creation of the CP market in 2005 was widely viewed as an attempt to circumvent the CSRC, which approves corporate bond issuance by listed companies, and the National Development and Reform Commission (NDRC), which has authority over enterprise bond issuance by non-listed state firms. Since its inception, commercial paper has rapidly surpassed corporate and enterprise bonds as the primary channel for non-financial companies to issue debt, due to NAFMII's speedier, less onerous approval process. Of the 2.2 trillion yuan ($349 billion) in corporate debt sold in 2011, only 124.1 billion yuan, or 5.6 percent, was issued under the supervision of the CSRC, according to central bank statistics.
A junk bond market could also provide a boost to China's nascent credit derivatives market. In 2010, China launched derivative products similar to credit default swaps (CDS) on a trial basis. Until now, however, the development of corporate CDS has appeared largely irrelevant, since defaults are rare in China's state-dominated bond market. With the development of a high-yield market, however, the CDS market could grow in tandem.
But Yin warns that the high-yield debt market will require China's relatively young ratings agencies to improve their capabilities. "Proper credit rating agencies will be key for the development of a junk-bond market and as China's credit rating agencies, in an overall view, are weak, it will be a hindering factor for the market," he said.
($1 = 6.3028 Chinese yuan)
