A security guard at a branch of the Bank of China in Beijing. Bond issuance in China is on the rise. China’s companies sold $410-billion (U.S.) in bonds last year, a 52-per-cent jump from 2010. But that’s still only about a third of what banks lent.The Associated Press
China has certainly cheered markets by easing lending curbs after an alarming slide in new financing last month. But its method – cutting banks' reserve requirements – doesn't guarantee that the funds freed up will find their way to the thirstiest sectors of the economy. A better policy to help companies struggling to borrow would be to further liberalize the bond market. Beijing has taken encouraging steps, but seems wary of opening new channels of credit for fear of making life too difficult for the banks.
Bond issuance is already on the up. China's companies sold $410-billion (U.S.) in bonds last year, a 52 per cent jump from 2010. But that's still only about a third of what banks lent. There's plenty of demand. The problem is that China has three bond markets, each with a different regulator. One approves sales of longer-term bonds by state-owned behemoths preferred by investors like insurers and pension funds. Listed companies issue bonds with the approval of the stock-market regulator. The fastest growth is in commercial paper overseen by the central bank's quasi-regulatory financial association.
Debt investors are starved for choice, so bonds are cheaper than loans for companies lucky enough to have access to the market. The biggest issuers last year were China's big state-owned policy banks.
China gives the impression of wanting to see a more developed bond market. It has set up a bond repurchase market, a central clearing house and bond insurance. A big January financial policy meeting triggered reports that China intends to lift a 20-year ban on trading bond futures and allow trading in junk bonds. But eliminating the regulatory barriers separating these markets – and opening them further to foreign underwriters and investors – would stimulate sales and trading, which is virtually nonexistent now.
Such measures could also help get credit to the smaller, service-sector companies that must flourish if China is to reduce its dependence on exports and fixed asset investment. But they would increase competition for banks grappling with slowing growth. And like governments elsewhere in Asia, Beijing has relied on banks to channel funds to favoured industries. Promoting bonds means surrendering some control over how China's savings are deployed. Don't expect Beijing to modernize its bond market in a hurry.
Wayne Arnold