Mutual funds get go-ahead for bonds

PUBLISHED : Wednesday, 20 June, 2012, 12:00am
UPDATED : Wednesday, 20 June, 2012, 12:00am


Beijing has approved the mainland's two trillion yuan (HK$2.5 trillion) mutual fund industry to invest in the newly created high-yield bond market, offering fund managers a new alternative.

The China Securities Regulatory Commission (CSRC) issued a circular to asset managers, allowing them to buy bonds offered by small- and medium-sized firms - or junk debt - according to two fund managers. The green light comes less than two weeks after the regulator officially launched the high-yield bond market, and reflects the CSRC's efforts to help small businesses raise funds.

On June 8, Suzhou Huadong Coating Glass became China's first issuer of high-yield bonds, netting 50 million yuan worth of two-year debts at an annualised interest rate of 9.5 per cent on the Shanghai exchange.

Allowing mutual funds to buy junk debt is expected to boost the market as financing demand for small businesses rise. The sources said each mutual fund would be able to earmark a maximum 10 per cent of their total assets for investment in each high-yield bond. But money-market funds are barred from buying junk debt, the sources said.

Fund managers welcomed the move as it provides them with a new investment channel at a bearish time for the mainland stock market.

Beijing took just three months to complete preparations for the high-yield bond market, with CSRC chairman Guo Shuqing keen to support cash-hungry small businesses. Previously, only firms with credit ratings of AA and above could offer bonds. Junk debts, seen as riskier investments because of concerns about solvency of lower-grade companies, normally offer interest rates three times the central bank's benchmarks.

Separately, the nation's insurance regulator is soliciting public opinion on a draft rule on insurers participating in the yuan qualified foreign institutional investor scheme.