Central banker urges end to mandatory bond guarantees
A senior mainland central banker has called for the scrapping of the requirement that all corporate bond issues be guaranteed.
The rule would concentrate too much risk on the already weak banking sector as the country moved to expand its corporate bond market to give more firms an additional fund-raising channel, People's Bank of China deputy governor Wu Xiaoling said.
'The existing regulations ... required corporate issuers to acquire guarantees, and the guarantees have all been issued by state-owned commercial banks,' she said at a capital markets forum organised by the People's University in Beijing over the weekend.
'The rules eliminate the distinction between issuers of different credit quality and shift the risk instead to financial institutions, particularly commercial banks.'
As a new crop of institutional investors such as mutual and insurance firms had emerged to replace individuals as major investors, the existing regulations should be revised to emphasise investment risk and the mandatory guarantee rule should be removed, she said.
Work to amend the corporate bond rules is under way.
The mainland's banking sector already bears a disproportionate burden for fuelling the country's economic growth, with more than 85 per cent of its funding needs met by bank lending in 2003.
Corporate bonds accounted for a tiny fraction of limited direct fund-raising by the mainland government and companies in the stock and bond markets - 2.9 per cent of the 1.2 trillion yuan raised through such channels in 2003 - because of over-restrictive policies.
The mainland relaxed rules to allow non-state-owned companies to issue bonds as early as 1993. But in the wake of a wave of bond defaults in the 1980s and 1990s, the National Development and Reform Commission and its predecessor, the State Development and Planning Commission, have taken a 'zero-risk' regulatory approach.
In effect, only a few large, high-credit-quality state firms have been permitted to issue bonds.
Instead of allowing investors to take the risk for making a bad investment choice, issuers are required to obtain a guarantee.
Most of the corporate bond issues approved so far also raised funds to finance projects, rather than to meet companies' day-to-day operational needs.
Efforts are under way to expand the corporate bond market to 'rationalise' the structure of the mainland's financial assets and alleviate the burden on banks.
Ms Wu urged the removal of existing restrictions on corporate bond issuers' qualifications, fund-raising scale and coupon rates as well as a shift in regulatory focus.
'Companies should all be allowed to issue bonds. The key issue should be information disclosure and whether the bond price can compensate investors for the risks they are taking.'