China’s anaemic corporate bond market is set to expand exponentially after Beijing loosened its grip on the sector by introducing a new regulatory regime, reports the FT. The move puts yet another nail in the coffin of Mao Zedong, as one faction of the nominally communist government won a decisive victory over another, writes the FT’s Jamil Anderlini. This is no obscure quibble of Marxist ideology, but a tussle over the future of China’s nascent corporate bond market, he says.
Under the new regulatory framework, the sector will soon be regulated by the (relatively) liberal China Securities Regulatory Commission (CSRC) instead of the extremely conservative central planning agency, the inappropriately named National Development and Reform Commission (NDRC). Another blow to the vision of a worker’s utopia is not far behind:
“Because China’s corporate bond market is virtually non-existent, there is little use for a credit-rating industry. Every bond issuance that does manage to slip through the iron grip of the central planning agency is rated AAA, including at least one company implicated in a corruption scandal that brought down the Communist party secretary of Shanghai last September.”
“With a functioning bond market and prices decided by the market, you won’t be able to rate everyone triple A anymore,” one market participant said. It may take the domestic ratings agencies some time to get up to speed, but they will be spurred on by competition from companies such as Moody’s, Standard & Poor’s and Fitch, who are all eagerly awaiting the creation of a real credit market in China, Anderlini notes.
Corporate bonds are virtually non-existent in China, mostly because they have been regulated up to now by the NDRC, which has allowed only a handful of giant state-owned enterprises to issue bonds through a limited and extremely opaque quota system. It sets the price and issue date for the bonds and requires them to be underwritten by the state’s commercial banks.
In developed economies such as the US, the fixed-income market is roughly double the size of the equity market but China’s corporate bond market in China is tiny compared with a total stock market capitalisation of Rmb18,000bn ($2,358bn).
Total corporate bond issuance last year was just Rmb105bn and, although the NDRC has raised the quotas, total issuance so far this year has reached just Rmb99.3bn.
The CSRC regulations do away with any kind of quota system, allow bond prices and interest rates to be set by the market, lay out clear criteria for bond issuance and require bonds to be backed by the assets of the issuing company.
Officials say the CSRC’s regulatory authority eventually will be expanded to cover all companies that have established a corporate structure, leaving only bonds issued by the largest state-owned conglomerates under the control of the NDRC. More than 90 per cent of corporate financing in China still comes from bank loans, so the new regulatory environment will enable companies to move to more direct financing through the capital markets, Gao Feng, head of global markets in China for Deutsche Bank, told the FT.