China made a significant step forward when it announced last month that convertible bond issues by several H-share companies could get the green light this year. The revelation highlights Beijing's renewed willingness to adopt the financial instrument, the development of which has been stalled by Beijing's go-slow policy, ever since the first overseas convertible bond issue by Shanghai-listed B share China Textile Machinery. China is plodding its way through the fast-changing world of high finance, while its cash-strapped firms cry out for more funding channels. It is fully understandable why the state has taken a cautious approach to bond issues due to its already heavy burden of foreign debt. At the end of last year, the government's foreign debts soared 14.8 per cent to US$106.59 billion. A convertible bond, which can be converted into the shares of a company, usually within a given time, is classified as debts of the company. The first H-share company was listed in Hong Kong three years ago. Chinese companies are now seeking to raise additional funds to feed expansion drives and fend of challenges by foreign competitors. The call for more funds is growing louder, as mainland companies find themselves squeezed dry of credit under Beijing's three-year austerity programme. Yizheng Chemical Fibre was the first of them to tap shareholders' pockets after its initial public offering, with a $1 billion share placement in March last year to pay for its expansion programme. The world's fourth-largest polyester maker is now under renewed fund-raising pressure as it looks for capital for the next phase of its expansion over the next five years, which is to cost 14 billion yuan (about HK$13.01 billion). Shanghai Petrochemical is reportedly looking into a convertible bond issue to help finance part of its 4.7 billion yuan expansion plan over the next three years. Other potential fund-raising targets include Guangzhou Shipyard International, which wants to establish a shipbuilding and repair facility in the Pearl River estuary for large vessels. Jilin Chemical Industrial Co also is in need of funds, with its massive 300,000 tonne ethylene project costing 19.9 billion yuan. Although 12.6 billion yuan of the cost is to be shouldered by its parent company, the listed company has agreed to buy out the portion of the project financed by its parent by 2002. Convertible bonds are preferred by companies and shareholders because they do not immediately increase the number of shares and therefore dilute earnings per share. The cost of such issues is also lower than the cost of loans on the mainland. Given the worldwide trend of falling interest rates, bonds are increasingly seen by investors as an attractive fixed-income instrument. While Chinese companies will be more than willing to tap such funding channels, the big question is whether they are attractive enough to draw investors. As convertible bonds allow holders to exchange into ordinary shares at a pre-determined price after a certain period of time, the underlying companies have to have long-term potential, lifting the share price high enough to entice holders to convert, or they have to repay the holders the face value of the bonds. No case can illustrate this point better than Shougang Concord Grand, a red-chip company under the banner of the embattled Beijing's Shougang Corp, which issued Swiss franc convertible bonds in 1994. As a result of the appreciation of the Swiss franc, the company suffered on two fronts - making a foreign exchange loss on translation of outstanding convertible bonds, and making a provision for paying a premium on early redemption of bonds as the stock's market price is far below the conversion price. It is time that Beijing steps up introduction of new financial instruments, but success will hinge on whether the companies themselves are fundamentally sound.