Small firms get green light to sell junk bonds

PUBLISHED : Thursday, 08 January, 2009, 12:00am
UPDATED : Thursday, 08 January, 2009, 12:00am

PBOC to boost sale of foreign-currency debt

For the first time on the mainland, some small and medium-sized businesses will be allowed to issue high-yield, or junk, bonds on the interbank bond market to raise operating funds, according to the central bank.

The People's Bank of China also said it would encourage domestic institutions to sell foreign-currency debt on the interbank debt market. But the central bank offered no further details on either move.

Sinosafe Insurance bond trader Gu Chunyue said there was no pure junk bond on the mainland market except for some high-default-risk bonds.

Mr Gu said junk bonds would not be welcomed by investors in the interbank market because most investors were state-owned enterprises, which were typically averse to high risk.

'Most corporate bonds on the interbank market have been ignored by the bulk of investors, especially as the global financial crisis has worsened,' he said.

Shenyin & Wanguo Securities bond analyst Qu Qing said companies did not have a lot of scope to issue junk bonds.

Mr Qu said that if the bond yield was higher than bank loan rates, companies would rather borrow money from banks than issue high-yield bonds.

As for encouraging domestic institutions to sell foreign-currency debt, he said he was surprised given recent expectations of the yuan's depreciation.

Early last month, the yuan suddenly hit the PBOC's tightly controlled bottom trading limit for four straight days.

It was the first time the yuan had hit bottom since its peg to the US dollar was replaced in July 2005, triggering expectations that the currency would drop further.

Mr Qu said sales of foreign-currency bonds would help to ease the pressure on the PBOC after it was forced to mop up a yuan glut by reducing the dollars it converted into yuan before late last year.

He said that unlike in the past, the sale of foreign-currency bonds would put huge pressure on liquidity in the domestic banking sector, with the funds rushing out of the mainland.

China's foreign reserves, the world's largest, stood at US$1.906 trillion at the end of September, the last date for which official figures have been reported.

State Administration of Foreign Exchange official Cai Qinsheng said last month that the reserves had fallen to below US$1.9 trillion.

'I do not think the PBOC will boost issues of foreign-currency bonds this year. Such issues would counter its efforts to ease monetary policy,' Mr Qu said.

The PBOC has cut its benchmark interest rate for the fifth time and lowered the reserve requirement of funds of banks deposited in the central bank for the fourth time since mid-September to shore up the economy.

In addition, the central bank has said it will allow some small and medium-sized enterprises to issue joint bonds to finance operations, and allow more overseas investment institutions to participate in the interbank bond market.