China to Allow Smaller-Company Bond Issues From June

China will allow small and medium-sized companies to sell bonds through private placements starting next month as part of measures to broaden financing channels for businesses struggling for funds.

The first batch of bonds under a trial program will be introduced in mid-June, the Shenzhen Stock Exchange said in a statement on its website yesterday. Property and finance-related companies are barred from the trial, it said. The bonds will be sold through Shenzhen’s exchange, with no more than 200 investors allowed to take part in any placement, according to the statement. 

China’s efforts last year to cool inflation and rein in home price with lending curbs and higher interest rates also reduced the availability of financing for smaller businesses, leading to a spate of bankruptcies and suicides in the city of Wenzhou. The nation is also encouraging companies to raise more funds through stock and bond sales to reduce their dependence on bank loans and increase the transparency of their finances.

“Banks are reluctant to lend after they switched from aggressively seeking lending to aggressively seeking risk control this year,” Zhang Zhiming, head of China research at HSBC Holdings Plc in Hong Kong, said. “This opens up a new venue of borrowing and mostly these are the SMEs that will tap this market.”

Smaller companies seeking to sell debt as part of the trials won’t have to meet net asset or profit requirements, the Shenzhen exchange said. The maturity of bonds issued under the plan must be one year or longer and the coupon shouldn’t exceed three times the central bank’s benchmark interest rate, the Shenzhen exchange said in its statement. The benchmark rate for a 12-month bank loan is currently 6.56 percent.

Coupon Cap

Without this cap on the coupon, “chances are that it could go way above that and that will increase the odds of default, and they don’t want that to happen,” Zhang said.

Three times the benchmark rate is still less than what private lenders in Wenzhou charged in April, according to the first private-loan survey published by the central bank’s branch in the eastern city that’s a hub for smaller producers of eye glasses, lighters and shoes. That rate was 21.6 percent.

Smaller companies already pay more than larger state-owned enterprises to borrow from the bond market. Leshi Internet Information & Technology (Beijing) Co., a video website operator, sold three-year bonds this month priced to yield 9.99 percent, according to data compiled by Bloomberg. China Guodian Corp., the nation’s third-biggest power producer, sold three-year bonds at 4.24 percent this month, the data show.

Bond Default

China has also yet to have a default in its bond market. Shandong Helon Co., a fiber maker in eastern China, paid off its 400 million yuan bond in April despite overdue loans of 956.7 million yuan. It was unable to pay 60.45 million yuan in loans and interest owed to a branch of China Construction Bank, the company said May 20.

China Securities Regulatory Commission Chairman Guo Shuqing said in March that the nation may start trials allowing companies to sell high-yield bonds as soon as the first half. Guo has been an advocate of expanding China’s corporate debt market, saying in a March interview with the official People’s Daily that the country’s equity and bond markets “seriously”lag behind the demands of the real economy.