Beijing Spurs a Bond Boom

Volume is surging as Chinese companies turn to the bond market to raise capital.

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Two years ago China’s IPO market was booming as companies took advantage of surging demand to raise cheap equity financing. Today, with the stock market depressed after a historic plunge in 2008, the bond market is where the action is.

Peking University Founder Group Corp., the country’s second-largest personal computer maker, last month issued 1 billion yuan ($146 million) of six-year bonds to finance its expansion, including a doubling of its semiconductor production. The company decided a bond issue would be more cost-effective than selling additional shares in any of its five subsidiaries that are listed on stock exchanges in Shanghai, Shenzhen, Hong Kong and Kuala Lumpur.

“It’s difficult to issue shares right now,” company spokesman Liu Wei tells Institutional Investor.

The bonds pay an interest rate of 5.5 percent for the first three years and will be reset between 5.5 percent and 6.5 percent for the last three. They were priced to yield 3.51 percentage points above the one-year Shanghai interbank offered rate. The issue was two times oversubscribed, according to Credit Suisse Founder Securities, a joint venture between the Swiss bank and Peking University Founder Group’s securities arm that arranged the offering.

The computer maker has plenty of company. Chinese enterprises issued $69.5 billion in bonds last year, up 74 percent from 2007, making the country’s bond market the second largest in Asia after that of Japan, where volume totaled $105 billion, according to data provider Dealogic.

Issuance could more than triple, to as much as 1.5 trillion yuan, or $220 billion, this year, predicts Joseph Chee, Beijing-based head of global capital markets at UBS Securities Co. The firm, which is managed and 20 percent owned by Switzerland’s UBS (the rest is held by the Chinese government), ranked seventh as an underwriter last year, managing four bond issues worth $2.9 billion, according to Dealogic. A recent decision by the State Council to allow commercial banks to trade exchange-listed corporate bonds should encourage issuance by spurring the development of a secondary market. The decision, which is expected to take effect in coming months, will help establish a clear yield curve, says Chee. Currently, there is almost no secondary trading. And the China Banking Regulatory Commission said in January that it was considering allowing foreign banks to underwrite and trade corporate bonds; at present, they are able to trade only bonds issued by government entities or financial firms.

“As China’s GDP catches up with Japan’s, China’s corporate bond market also will rival Japan’s,” says Wei Ding, head of investment banking at China International Capital Corp. In January, CICC led a 15 billion yuan offering of three-year, 2.7 percent bonds by PetroChina Co. — the largest issue so far this year. CICC ranked fourth in underwriting in 2008, managing 15 issues worth $5.7 billion.

Bond issuance took off in 2008 after the government expedited regulatory approvals. In September 2007 the authorities allowed listed companies to obtain approval for issues from the China Securities Regulatory Commission; previously, they had to get an okay from the National Development and Reform Commission, a policy think tank that wasn’t geared for granting quick approvals. Last year the government also gave the People’s Bank of China authority to approve bond issues with maturities of more than one year. Most corporate bonds have maturities of between three and ten years.

Further liberalization is expected in the next year or so. UBS’s Chee says the government is likely to allow foreign entities to tap the Chinese market with issues that will be known as “panda bonds.” Bond issuance is surging around the world, raising concerns about the capacity of markets to absorb the paper, but bankers say Chinese investors can easily handle the volume. The National Council for Social Security Fund, which manages more than $74 billion in Chinese pension money, is a major buyer of corporate bonds, says Colin Law, a Hong Kong–based partner with U.S. law firm O’Melveny & Myers. Other Chinese asset managers are also hungry for fixed-income investments, he notes. “There’s a lot of liquidity in China chasing investment products,” Chee says.

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