China eases bond issuance rules for top rated firms in bid to boost economy amid trade war with United States
- National Development and Reform Commission guidelines trigger rally, with property developers and local government financing vehicles expected to benefit
- But smaller and weaker private sector firms miss out on easier financing and are set to come under additional pressure from maturing debt in next two years
China’s economic planner has relaxed rules for top rated firms seeking to raise funds in the domestic bond market, a move that alleviates refinancing concerns for property developers and local government financing vehicles.
The guidelines from the powerful National Development and Reform Commission (NDRC) are the latest measures to support the development of China’s bond markets as authorities aim to wean companies off relying exclusively on bank lending, while also easing funding conditions for private firms.
The NDRC announced last week explicit financial criteria for top-credit rated firms to be able to raise funds in the bond market.
The firms should have a debt ratio of less than 85 per cent and not have defaulted on loans in the last three years.
The NDRC issued requirements on an industry by industry basis, with separate rules for areas including property, manufacturing, cement, hotel and catering.
For property or construction firms, for example, the minimum size of assets needed to issue bonds is 150 billion yuan (US$21.74 billion) with a minimum annual revenue of at least 30 billion yuan (US$4.35 billion).
In the past, the NDRC has regulated the bond market for China’s state-owned enterprises, while the People's Bank of China (PBOC) has controlled non-financial enterprises debt instruments and the China Securities Regulatory Commission has regulated bonds traded on China’s stock exchanges.
But the three ministerial bodies are now vying to reshape the country’s fragmented corporate bond market, with the NDRC's latest rules showing that property developers are also covered by its jurisdiction.
By clarifying the issuing standards by industry, the latest rules make it easier for companies to register and meet the requirements.
The announcement of the new rules triggered a rally in leading Chinese high yield bonds, with analysts expecting property developers and local government financing vehicles to benefit the most.
The yield on AAA-rated three-year corporate bonds dropped to 3.7785 per cent last week, its lowest level in two years, according to financial data vendor, Shanghai Wind, reflecting sliding corporate funding costs.
“The new guidance signals support for bond issuance. Industry leaders are being provided with additional access for their funding demands,” said Becky Liu, head of China macro strategy at Standard Chartered Bank.
China’s credit growth has remained stubbornly weak despite moves by the PBOC to ease monetary policy, including four bank reserve requirement ratios cuts this year.
Chinese banks extended 1.25 trillion yuan (US$181.22 billion) in net new yuan loans in November, up from 697 billion yuan (US$101.05 billion) in October and roughly in line with November last year.
And growth rate of outstanding total social financing, a broad measure of liquidity and credit in the economy, slowed to a new all-time low of 9.9 per cent last month from 10.2 per cent in October.
The data shows that more supportive polices are still needed, analysts agreed, but more importantly, highlighted the need for policymakers to figure out a method to effectively channel funding to private sector firms in the real economy, given that the PBOC’s existing attempts to boost funding have been ineffective.
China has long been reforming its complex and rigid administrative process for corporate bond issuance.
Bond markets have the advantage of reducing a firms’ reliance on bank lending as well as easing the financial burden on banks since corporate financing will be spread across a broader set of investors, including securities firms, investment funds and insurers.
Last month, the central bank said it would promote the use of credit risk mitigation tools, which act much like credit default swaps to compensate the bond buyer if the bond issuer defaults, to support bond issuance by private firms.
Last week, Shanghai-listed fibre optic cable maker Hengtong Optic-Electric and Shenzhen-listed Guangzhou Zhiguang Electric were the first to issue bonds under the credit risk mitigation scheme.
Chinese private companies have defaulted on 67.4 billion yuan (US$9.78 billion) worth of bonds so far this year, more than four times the figure for all of 2017, local media reported.
Smaller private firms have had significant trouble raising funds after Beijing’s campaign to reduce excess debt and risky lending tightened the shadow bank or unregulated financing on which these firms relied.
In addition, the weakening of China’s stock market, the worst performer in the world this year, further hurt the ability of these firms to raise funds.
Property developers were particularly hard-hit by the reluctance of banks to lend to the sector amid slowing sales growth and declining business confidence due to prolonged trade frictions with the United States.
Until last week’s announcement, the NDRC was only granting bond issuance quotas to companies with government links, forcing property developers to tap the offshore US dollar bond market, or the domestic bond markets for corporate bonds and medium-term debt notes that were regulated by the central bank, analysts said.
The new NDRC rules will especially benefit property developers involved in shanty town redevelopment as well as social and rental housing projects because proceeds raised from the bonds should be invested in these types of projects, according to Kai Yin Tsang, senior vice-president at Moody’s Investors Service.
Neel Gopalakrishnan, credit strategist at DBS Bank, said smaller and weaker companies, however, will continue to face financing challenges next year even as stronger companies benefit from broader access to funding.
Smaller and weaker companies will be under heavy pressure from the large wall of upcoming debt issues that will mature over the next two years.
Around US$29 billion of sub-investment grade and unrated bonds will mature in the offshore market in 2019, followed by US$40 billion due in 2020, according to Bloomberg data.
China has refrained from massive stimulus so far to keep a lid on overall debt levels within the economy, especially the growth of “hidden” local government debt – debt raised by the government through intermediaries so that it is not recognised in the annual budget.
Provincial local governments have been skirting borrowing limits set by Beijing’s debt reduction campaign by raising funds through local counties, prefectural cities or lower level local government financing vehicles and state-owned enterprises.
For example, the PBOC said that the “hidden debt” of an unnamed province was 80 per cent higher than its explicit debt, according to its 2018 China Financial Stability Report published last month.
Concerns have emerged, however, that any attempt to clamp down on local government debt could adversely affect financing of local infrastructure projects, a key part of the central government’s plan to stabilise the economy amid the trade war with the United States.
Ding Shuang, chief economist at Greater China and North Asia at Standard Chartered Bank, estimated that the central government would increase the official local government special bond issuance quota to 1.9 trillion yuan (US$275.45 billion) next year from 1.35 trillion yuan in 2018. Special bonds are not included in local government budgets.
