Corporate debt move a watershed for market

Multinationals are set to get equal access to the domestic corporate debt market in a move that’s being hailed as a major breakthrough in the opening of the financial services sector.

The decision to allow foreign companies to issue renminbi bonds came out of the recent Sino-US strategic economic dialogue held in Beijing.

Many multinationals in China have long recognized the advantages of sourcing renminbi funds to back fast expansions on the mainland. Of 12 multinationals in China surveyed by Standard Chartered earlier this year, 75 percent were keen to raise renminbi capital to help finance mainland operations.

Stephen Green, senior economist at Standard Chartered, said: "It (issuing renminbi bonds) would provide (relatively) cheaper funding for multinationals to improve employment opportunities and push productivity growth onshore."

As the central bank takes a tighter fiscal stance next year, local and foreign companies on the mainland are expected to rely more on raising capital directly from investors, analysts said.

"Issuing renminbi bonds has long been studied by many multinational companies in China," said Green. "Now they have become even more keen on the prospect of bond issues at a time when getting bank loans is becoming more difficult than before."

At a financial forum last Sunday, Wu Xiaoling, deputy governor of the People’s Bank of China, called for faster expansion of the mainland’s capital market to fund the development of small- and medium-sized companies. "If capital markets for direct financing are further developed, bank loans to small firms will not be squeezed, which will reduce the impact of fiscal tightening on the real economy," Wu was quoted in media reports as saying.

The opening of the domestic corporate bond market to qualified foreign issues would also help raise the standard and widen the scope of the long-term capital market and offer a viable alternative to institutional investors, including pension funds and insurers.

Liao Qiang, associate director of financial institution ratings at Standard &Poor’s, said that foreign bond issue would benefit the domestic bond market most. "Foreign issuers will bring along their advanced rating mechanism, which provides references for the local issuers."

Nie Wen, an analyst on fixed income securities at Industrial Securities, said the participation of foreign issuers into China’s debt market would help attract more liquidity into the market rather than crowding out local issuers. "The participation of foreign issuers is expected to help improve the debt market liquidity," said Nie. "By bringing in the international market mechanism, which requires bonds issue truly reflect the credit status of issuers, more and more investors will be attracted to the debt market."

In the two-day Sino-US talks in Beijing, which ended on December 13, China agreed to allow qualified foreign listed companies to raise capital by issuing bonds or new shares. But analysts said foreign companies prefer bond issues as they are a less costly way to raise stable long-term funds – provided mainly by institutional investors.

The China Securities Regulatory Commission (CSRC) is trying to push the development of the corporate bond market. In the past, only large State-owned firms could issue bonds with the approval of the National Development and Reform Commission. But since June, all listed companies can apply to the CSRC for approval to issue fixed-interest debt instruments. Two companies have already issued long-term bonds to raise a combined 5.2 billion yuan. Many more issues are in the pipeline, bankers said.

"Compared with bank loans, the lower cost of raising renminbi bonds would be seen as a major advantage for a large number of foreign companies," said Nie. For example, the current interest rate on five-year bank loans ranges from 7.83 percent to 7.1 percent, while the current yield of a corporate bond with a five-year maturity is estimated at 6 percent – substantially lower in the long term even including the one-off issuing cost of about 1 to 2 percent of the amount raised. Foreign companies with high credit ratings can raise funds at an even lower yield.

Analysts said introducing foreign issuers, whose ratings are based on the international system, will bring China in line with international standards.

"It provides local rating agencies with opportunities to learn about the international rating standard," said Liu Xin, general manager of the fixed-income securities department at Guotai & Jun’an Securities in Shanghai.

Analysts also expect corporate bond issues by foreign companies will provide an alternative to local investors, both institutional and retail.

"Households may only have eyes for A shares and local investment funds today, but they will not be so enamored," said Green. "It (corporate bonds) will boost returns for local investors, giving them safe exposure to the companies who are succeeding in the world."