That knocking coming from a small corner of the Chinese debt
market is the sound of private business owners banging on doors
for bond financing.
The noise has been drawing considerable attention since
2011, when bond issuance by Chinas small- and
medium-sized enterprises (SMEs) most of which have an
annual revenue of less than 300 million yuan ($48 million) and
have little access to bank credit nearly tripled from
the year before. And its sweet to the ears of Chinese
officials, who have been encouraging support for SMEs since
2009 when the State Council, Chinas cabinet, introduced
tax cuts and other incentives for these companies. The
government sees smaller companies as vital to the nations
economy and has been encouraging the growth of a corporate bond
market as part of its long-term effort to develop and
strengthen the countrys financial system.
The bond business continues to grow rapidly. In 2011 and
2012, 572 SMEs borrowed a total of about 315 billion yuan on
the bond market, almost four times the amount they raised in
the three years between 2008 and 2010, according to
Chinas National Association of Financial Market
Institutional Investors (NAFMII).
SMEs accounted for just a fraction of the 5.87 trillion yuan
in bonds issued by all Chinese entities in 2012, according to
the China Central Depository Clearing Co. Yet that was
significant for a market in which most finance goes to the
central government, big state-owned enterprises, the
governments policy banks and local government financing
platforms. Those four sectors accounted for roughly three
quarters of all issuance last year, according to the
The bond market has been increasingly filling a void left by
credit-shy banks, which since 2011 have slowed the pace of
lending in response to government macroeconomic controls aimed
at preventing the economy from overheating. Guotai Junan
Securities reported strong demand for corporate bonds and notes
in March of this year, when 57 state-owned enterprises (SOEs)
and four SMEs issued bonds. Net bond financing for all
enterprises, including SMEs and the state-run giants, jumped to
190 billion yuan in April from 101 billion yuan in April 2012,
the Peoples Bank of China reported on May 15.
Traditionally, many bond market investors have been
reluctant to wade into the SME sector. Those borrowers
mainly are smaller-scale, privately owned companies which
do not obtain any government support, explains Chris Lau,
a portfolio manager at Hong Kongbased Bosera Asset
Management (International) Co., whose mainland parent company
is one of the biggest investors in enterprise bonds, or debt
issued by Chinas big state-owned companies. The Hong Kong
outfit has a 31 billion yuan quota to invest in mainland
markets under Chinas Renminbi Qualified Institutional
Investor (RQFII) program; it invests mainly in short- and
medium-term notes, corporate bonds and enterprise bonds but
does not have much exposure in SME bonds, says
Bosera will be a bigger buyer in the future, though.
We expect to gradually increase investment in SME bonds
in the coming years, says Lau. Mainland SME bonds
represent relatively good investment opportunities in the long
run, he adds, because the government encourages
companies to shift the source of funding from traditional bank
loans to the debt capital market.
Attractive yields provide another reason for increased
interest. SME bonds, which generally have maturities of about
30 months, offered yields of 6.37 percent on average last year,
according to NAFMII. By comparison, yields on the Chinese
governments recent three-year treasury bonds were in the
2.75 percent range, while in March, China Railway Corp. offered
20 billion yuan of five-year bonds at a rate of 4.5 percent. It
was the companys first bond issue since it was spun off
from the Ministry of Railways.
Private companies issuing SME bonds include manufacturers of
consumer staples, electronics, environmental products and
producers of chemicals and raw materials. Its rare for an
SME bond to carry a rating higher than single-A.
To help offset the increased credit risk, underwriters
sometimes combine two or more SMEs into a single issue, known
as an SME collective bond. In July 2012, Industrial
and Commercial Bank of China (ICBC) sold 230 million yuan of
three-year bonds collectively on behalf of Shanghai Debang
Logistics Co. and Shanghai Wantai Aluminum Co. The two
companies were rated A and BB+, respectively, by Shanghai
Brilliance Credit Rating & Investor Service Co.
Mainland retail investors can access SME bonds through
wealth management plans sold by banks. In addition, insurance
companies have been stepping up their participation in the SME
bond market, according to NAFMII.
The SME bond sector should get another boost this month from
the Shanghai and Shenzhen stock exchanges. The bourses plan to
introduce the first Chinese platform for high-yield bonds,
which would raise cash specifically for smaller companies that
arent listed on either exchange. The new platform is
designed to expand financing channels for SMEs, to
support the development of the real economy and protect
the legal rights and interests of investors, the Shanghai
Stock Exchange said in a statement.
A wider investor base should help the SME market to develop.
As of last year about half of all outstanding SME bonds were
held by banks, according to NAFMII. A recent report from the
association said including SME bonds in a diverse portfolio
carried relatively low risk for investors.