China will encourage enterprises to look to the bond market for new funding this year, rather than rely on bank borrowings, amid relatively tight liquidity in the banking system.
The National Development and Reform Commission (NDRC), the top economic planning agency, made the goal clear as it said on New Year’s Eve that authorities will push corporate bond sales in 2014 to diversify the funding sources for firms and reduce the pressure on banks.
Promoting the bond market will also help the government’s urbanization and other broad economic objectives, the NDRC said on Dec. 31. Funds raised through bond sales can be used for initiatives such as subsidized housing, infrastructure and energy-saving projects, as well as on restructuring needed to resolve industrial overcapacity, it said in a question and answer session on corporate bond market development.
China’s bond market has seen strong growth in recent years and now accounts for about 14 percent of the total social financing. Corporations have raised 3.2 trillion yuan through bond issues between 2000 and November 2013. In the first eleven months of 2013, companies raised 570 billion yuan through bond sales.
Of the funds raised from corporate bonds in the past decade, about 947 billion yuan is said to have been used for railway, highways, ports and airport construction projects, while 478.6 billion yuan has gone into hydropower, solar energy, wind power, coal mine and other energy projects. Meanwhile, 468.5 billion yuan is estimated to have been used in infrastructure initiatives of local governments.
Corporate bonds will become a major tool for the government to support the real economy, the NDRC said. The government will increase the transparency of the approval procedure for bond issuances so as to meet the policy goal. Applications from small and medium-sized enterprises will be accorded priority to support their business growth. Renewable bonds will be encouraged in major projects such as railways to meet the needs of capital-intensive infrastructure.
In addition helping new projects, the government will seek to create new bond category focusing on project-based mergers and acquisitions to solve the overcapacity issues across sectors. To facilitate more bond issues, a transparent credit rating mechanism would be put in place to enable investors to know more about the financial strength of the issuers. The government will urge the establishment of an open platform to share credit record information.
Chinese regulators have, in fact, already made some moves to ease the restrictions on corporate debt issuances. Authorities believe allowing more companies to issue debt on the bond market or tap funds directly will enable companies to access credit without putting pressure on the banking system.
Analysts say the initiative reflects regulatory efforts to balance the policy framework, while tightening credit supervision.
The China Securities Regulatory Commission retains the authority to approve or deny plans of listed firms for bond issues on a case-by-case basis, while the NDRC approves applications from non-listed and non-financial firms.
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