China Initiates Private Placements of Bonds

China has given the green-light for the private placement of bonds, another step towards expanding the role of direct financing in the economy, China’s interbank association has announced.

The new rules are aimed at boosting the development of China’s bond market to cut reliance on the banking system for financing, the National Association of Financial Market Institutional Investors (NAFMII) said in a statement.

According to the rules issued by NAFMII, an agency backed by the People’s Bank of China, a bond issuer can issue debt directly to designated buyers at a negotiated rate.

This will particularly help small firms access debt financing because they often find it hard to obtain good enough credit ratings or fulfill disclosure requirements to qualify for selling bonds publicly, NAFMII said

Private placement of bonds can be tailored to the issuer … to broaden financing channels for Chinese enterprises,” the agency said in a statement.

“It is an innovation not only in bond products but also in the method of bond issuance,” it added.

NAFMII, encouraged by China’s central bank, has played an important role in developing the country’s onshore bond market since its establishment in 2007 by creating new debt products and attracting new investors.

Due to in-fighting among different Chinese ministerial bodies, the nation’s corporate bond market is fragmented into three parts: “debt-financing tools” in the interbank market run by NAFMII and overseen by the central bank; enterprise bonds approved by China’s economic planning agency; and the small listed corporate bond market overseen by the China Securities Regulatory Commission.

The interbank corporate debt market, which includes short-term commercial paper and medium-term notes, easily dwarfs the other two in terms of size and trading volume.

In 2010, about 500 companies raised a total 1.3 trillion yuan in the interbank market. NAFMII is trying to boost that to 2.0 trillion yuan in 2011.

By contrast, 358.6 billion yuan was raised through enterprise bonds in 2010, and the Chinese securities watchdog approved issuance of only 60.3 billion yuan worth of bonds in 2010.

By April 17, the outstanding value of the 1,092 “debt-financing tools” in the interbank market was 2.5 trillion yuan, according to NAFMII. China’s outstanding bank loans were 52.6 trillion yuan at the end of March.

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