Opinion: Corporate bond market is key
( 2002-08-01 09:35 ) (1 )

Domestic enterprises are raising more and more funds from the stock market nowadays, but the development of the corporate bond market has lagged far behind.

A timely push to ignite the corporate bond market is of great significance if China wants to improve domestic enterprises' financial structures and corporate governance, said an article in Outlook Weekly.

For enterprises, issuing corporate bonds is a major means of raising cash, just as important as listing on the stock market.

But while Chinese companies raised hundreds of billions of yuan from the home stock market, they issued corporate bonds worth less than 10 per cent of the amount of shares they sold in recent years.

A key problem which resulted from enterprises' propensity for stock floating is the low efficiency with which they utilize raised funds, noted the article.

Many listed companies use the funds to willfully invest in unfamiliar businesses. And some even use these funds to speculate in the stock market, seriously distorting the stock market's role of efficiency-oriented resource distribution.

A close observation of listed companies indicated that, due to loose supervision, financing through issuing stocks is not presently an effective way to facilitate the development of domestic enterprises, especially those with poor corporate governance.

In comparison, the development of the corporate bond market can impel enterprise managers to make better use of funds and improve enterprise performance under payment pressure.

There are three reasons to speed up development of the corporate bond market, said the Outlook article.

First, corporate bonds are a cost-effective financing channel for enterprises because the interest is lower than that paid for bank loans.

In addition, State banks are too cautious to grant loans because of their worries over an increase in bad debt.

Also interest rate for a five-year savings deposit is a mere 2.79 per cent, low enough to make corporate bonds a profitable long-term investment option for both individual and institutional investors.

Second, the coincidence of abundant individual bank deposits and low interest rates implies a market demand for new investment channels.

Now, investors with plentiful funds are vexed by the lack of diversified, profitable and not-so-risky investment channels. It is the right time for fund-thirsty enterprises to issue bonds to reduce their financing costs.

Third, the basic criterion for issuing corporate bonds is less harsh than that for making offerings on the stock market.

According to regulations, the candidate enterprise only needs to record its profits from three consecutive years to qualify for bond issue.

But the latest requirement for a listed company's right of issue is an average annual net-asset income ratio above 10 per cent for each of the previous three years.

In terms of the State policy, issuing bonds is a desirable choice for listed companies' refinancing.

Therefore, the development of the corporate bond market could begin with the refinancing of listed companies. Sound performances turned in by qualified listed companies will enhance investors' confidence in the new investment instrument. And the pressure to repay capital and interest will prevent listed companies from squandering raised funds.

In addition, the development of the bond market will widen domestic enterprises' financing channels and thus goad domestic banks to reform more quickly.

However, many problems still hinder the development of the corporate bond market in this country, which are pointed out in the article.

Apprehension that the enterprises' will be unable to repay capital and interest, and over the social problems that would engender, has largely undermined the authorities' confidence in the corporate bond market.

But dodging the problem is not a solution. The State should encourage star enterprises to try out corporate bond financing to deepen their efficiency-oriented reforms, urged the article.

Separated administration is also a cause of the underdevelopment of the corporate bond market.

Most corporate bonds are issued by central State enterprises engaging in infrastructure construction with strong administrative support. Few local enterprises can issue bonds in line with market rules.

The article suggested that all enterprises eligible for bank loans should be allowed to issue bonds and fix bond interest rates according to the market, with their bonds rated according to their repayment capability.

Township enterprises had spearheaded the issuance of corporate bond in the early 1990s. At that time, payment defaults by some of these enterprises had tremendously shaken the credibility of the whole corporate bond market.

To ensure sustainable development of the country's financial sector, a pressing task is to reduce the disturbance caused by information asymmetry in the financial market.

The underdevelopment of the secondary market is also a key problem, added the article.

Between 1991 and 1996, Chinese enterprises altogether issued bonds worth 152.5 billion yuan (US$18.4 billion), but less than 3 billion yuan's worth (US$361 million) were traded on the country's two exchanges in Shanghai and Shenzhen.

It is noteworthy, the article concluded, to develop the corporate bond market, but enterprises must be put under strict market scrutiny.