Easier bond rules may boost investment

The rules for bond issues may be eased to bolster investment as the economy slows.

The National Development and Reform Commission, the nation's top economic planner and regulator of State-owned enterprises' bond issues, is seeking opinions on a draft proposal that would change the rules so as to help fund projects in key sectors, Bloomberg News reported on Tuesday, citing unidentified sources.

The proposal, which was also seen by China Daily, lowers the required debt-to-asset ratio and drops limits on the number of note sales if proceeds are for projects favored by the government.

The favored areas include the previously announced "seven key sectors": Oil and gas pipelines, health and senior-care services, environmental protection, clean energy, food and water projects, transportation, and support services for oil, gas and mining. The changes will make it easier for local government financing vehicles to issue enterprise bonds. The debt-to-asset ratio will be relaxed to between 65 percent and 75 percent from around 45 percent for AAA-rated bonds.

The NDRC previously put strict limits on the number of bond sales by a municipal government. For example, a provincial capital could make up to four note issues annually, while an ordinary city could make two.

The draft proposal scraps these limits as long as the proceeds are used in government-preferred sectors.

Outstanding LGFV debt in the form of enterprise bonds and medium-term notes issued by a county or city can be as much as 12 percent of local GDP, compared with 8 percent previously.

"The proposal is in line with the government's efforts since last year to give more maneuvering room to the LGFVs. It could improve their ability to refinance debt and channel investment toward sectors the government deems important or conducive to economic restructuring," said Wang Ying, senior director for corporate ratings at Fitch Ratings Inc.

"While allowing LGFVs to sell more bonds and telling banks to lend money to them aren't in line with China's long-term reform goals, it's necessary to address short-term slowdown problems," Yao Wei, a China economist at Societe Generale SA, was quoted by Bloomberg as saying.

Growth of fixed-asset investment, a pillar of the Chinese economy, fell to 12 percent in the first four months, compared with more than 20 percent just two years ago.

China's corporate bond market is crowded with issues from capital-intensive SOEs and LGFVs. According to Fitch, 90 percent of the outstanding corporate bonds were issued by SOEs as of the end of 2014. Issues by LGFVs had climbed to 32 percent of total corporate bond issues by the end of 2014, from 11 percent in 2008.

"Issues by private firms increased rapidly over the years, reaching 271 billion yuan ($43.70 billion) in 2014, but still accounting for only 6 percent of the market," said Wang.

The report noted that China's fast-growing bond market is hampered by regulatory fragmentation, which is not expected to be resolved in the near future due to strong bureaucratic interests.

China's 36 trillion yuan bond market is split among the interbank market, stock exchanges and other markets, all of which involve different regulators. The markets also vary significantly in size, trading volume and the type of instruments.

Fitch noted that although regulators are competing to expand their jurisdiction by actively introducing new instruments and broadening the issuer base, reforms are slow. For example, although the China Securities Regulatory Commission has broadened the definition of qualified issuers from listed firms to all corporations, and shifted from an approval-based system to a registration-based one, issuers still are subject to approval in practice.