By Tom Miller
They may not be as sexy as their Martini-sipping namesake, but bonds are important. A properly functioning bond market helps allocate capital efficiently and allows central bankers to set appropriate interest rates.
But the stunted Chinese bond market has long been a weak link in China’s bank-dominated financial system.
Two years ago, when Beijing ditched a quota system that limited annual corporate bond issuances to Rmb100bn and required that all bonds be underwritten by state-owned banks, hopes were high that the corporate bond market would spark into life. The new regulations were expected to give a new funding avenue to listed companies with weaker links to the state, and provide all listed companies with access to cheaper credit.
After a good start, however, corporate bond issuances, or gongsi zhai, fizzled this year: issuance in the first four months was a round, fat zero.
But there are signs that the bond market is picking up elsewhere – namely under the guise of medium-term notes, or zhongqi piaoju. Mid-term note issuance reached Rmb280bn in January to April, 60 per cent more than total issuance in 2008.
These 3-5 year bonds, which are approved by the People’s Bank of China (PBoC) and traded on the interbank market, have replaced corporate bonds as the debt instrument of choice, because costs are lower and issuance requirements set by the PBoC are less onerous than those imposed for issuance of corporate bonds.
Bond issuance will rise rapidly in over the next two years as local governments and companies try to bridge the stimulus-package financing gap. Only about one-quarter of China’s demand-stimulus programme will be financed by central government expenditure; the rest must come from local governments.
Most localities are short of cash – so they are relying heavily on bank loans, and increasingly on bonds.
Local governments in theory cannot borrow directly, so they use municipal investment corporations to take out loans or issue bonds — the advantage of the latter being that under Chinese rules bond finance can count as equity in infrastructure projects.
Companies are also jumping into the market. Last week, China National Petroleum Corp (CNPC) – the parent company of oil major PetroChina – issued $1bn of medium-term notes in the domestic interbank market, the first batch of a total $3bn issuance.
This is the first time a non-financial enterprise has a sold a bond denominated in US dollars in China (so much for the idea of the renminbi as an international reserve currency!). And, intriguingly, it may offer a new model for companies wishing to stock up on foreign currency to make overseas acquisitions.
The growing market for medium-term bills is a positive sign that China may, at last, be moving away from its traditional over-reliance on bank lending towards a more flexible financial system.
But it will be many years before banks relinquish their position as the engine room of Chinese finance. New bank loans in the first four months of this year were a massive Rmb4,600bn, dwarfing the total value of bond issuances many times over.