Across The Border

China’s fast-track bond offering system little help to tech start-ups, say analysts

PUBLISHED : Thursday, 04 May, 2017, 3:50pm
UPDATED : Thursday, 04 May, 2017, 9:59pm

China’s securities regulator has widened funding access for technology start-ups, allowing them sell debt on the nation’s stock exchanges under a more relaxed approval system.

But the liberalisation, a politically correct move enshrined in the national “mass entrepreneurship and innovation” campaign, may not be enough to help cash hungry tech businesses, say analysts.

The China Securities Regulatory Commission (CSRC) published a draft rule on the debt-offering mechanism in what it described as substantial support for the mainland’s innovation campaign.

Technology firms and investment funds focusing on tech start-ups will be allowed to sell bonds on the stock exchanges via a fast-track mechanism, according to the rule.

For the past year, the CSRC has portrayed itself as a market regulatory body that’s kept in line with the leadership when it comes to policymaking.

The creation of the bond offering system for start-ups is the latest sign that alignment with the central government’s directions is still a priority for the regulator.

Since 2013, the Chinese leadership has been heavily promoting technology innovation as a way to sustain growth of the world’s second-largest economy.

To encourage entrepreneurship and innovation, the easing of rules for financing by start-ups has been seen as desirable.

The fast-track bond system followed the CSRC’s decision in February to link the over-the-counter equity trading system with the Shenzhen Stock Exchange.

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Companies traded on the “innovation level” of the National Equities Exchange and Quotations (NEEQ) market, dubbed the new third board, are technically able to directly list on the Shenzhen bourse without going through an initial public offering procedure if they have a solid earnings track record.

The “innovation level” is distinct from the “basic level” on the NEEQ, a special status that reflects their robust financial performance and relatively larger market capitalisations.

In a surprise move in September the CSRC published a rule under which issuance of stocks and bonds by companies registered in impoverished regions could be fast-tracked, a policy echoing President Xi Jinping’s call for further poverty alleviation measures.

In late April, CSRC chairman Liu Shiyu told members of the Shenzhen exchange that the development of China’s finance industry couldn’t be carried out smoothly without the involvement of politics.

“Politics can move the stock market in China, but it doesn’t always work,” said Shen Ye, a Shanghai-based hedge fund manager. “Institutions and individual investors don’t seem to agree with the regulator’s policy directions.”

Investors are not interested in high-yield bonds due to increasing risks of defaults and companies are unable to offer a high interest rate
Gu Weiyong, chief executive of Shanghai Ucon Investment

The benchmark Shanghai Composite Index dropped below the 3,200-point level on April 17 and has yet to regain the lost territory since then.

“The 3,200-point level is currently viewed as the threshold for a boom or bust,” said Zhou Ling, a fund manager with Shanghai Shiva Investment. “As the indicator stays below the level, it is safe to say that fears of a further slide are dominating the market.”

On Wednesday, the key index closed 0.3 per cent lower at 3,135.35.

A consensus among retail and institutional investors is that Liu, who became CSRC chairman in February 2016, was reluctant to push ahead with planned reforms ahead of the 19th Communist Party Congress in autumn, during which a reshuffle at the top echelon of power will be implemented.

Liu is seen as a rising political star after he successfully stabilised a plummeting market amid a crisis of confidence.

His predecessor, Xiao Gang, stepped down after several missteps in overseeing the volatile market, including the introduction of a circuit-breaker mechanism that triggered a 10 per cent fall in the main gauge during the first week of 2016 that resulted in two trading suspensions on the overall market.

However, analysts are sceptical about the creation of the fast-track bond system, predicting it could be a “white elephant” that only helps Liu win kudos from the top leaders.

“The system doesn’t appeal to both buyers and sellers,” said Gu Weiyong, chief executive of Shanghai Ucon Investment. “Investors are not interested in high-yield bonds due to increasing risks of defaults and companies are unable to offer a high interest rate.”

As such, the bond offering system is unlikely be instrumental in helping start-ups raise funds.

The benchmark government bond yield hit the highest level in two years due to a panic sell-off at the end of April as investors were battered by liquidity worries amid a flurry of regulators’ directives targeted at curbing excessive borrowing.

A higher bond yield results in a higher interest rate offered by corporate issuers when they sell debt.

The current bond market conditions make it difficult for start-ups to raise funds through debt offerings. It is estimated that a small firm won’t be able to secure borrowing from a debt sale unless it offers an interest rate of 10 per cent a year.

In 2012 a junk debt market was established on the Shanghai Stock Exchange to facilitate borrowing for small companies hungry for capital.

However, the market appears to have closed its doors as few companies managed to complete debt sales because of the lukewarm response from investors since 2016.

Few small companies are able to afford the hefty 10 per cent interest payment expected by investors on the high-yield bond market.