China Firms Ditch Bonds For Banks in Search for Funds

By FeaturesDow Jones Newswires

Chinese companies are turning away from capital markets and heading back to state-owned banks to raise cash, in a reversal of Beijing's previous efforts to modernize the way the corporate sector in the world's No. 2 economy is funded.

China's bond and stock markets have provided about a quarter of all financing for companies in the past two years. This year, that proportion is down to just 6.6%, according to figures from Wind Info.

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The data is the latest evidence of Beijing's shift this year away from letting market forces play an ever-growing role in the country's economy, and back toward a reliance on centralized planning. As companies have raised less money from investors this year, they have borrowed more through traditional loans from state-owned banks, as well as China's burgeoning shadow banking sector.

"The worsening structure of financing in the economy has continued for nearly a year and there are no signs of easing," said Deng Haiqing, an economist at JZ Securities.

The turn away from markets in China is most striking in the slump in corporate bond issuance. Wind Info figures show, with two weeks left in 2017, Chinese firms have issued just 5.67 trillion yuan ($856.7 billion) worth of bonds, down 35% from a record 8.71 trillion yuan in all of 2016. Subtracting maturing bonds, net corporate bond financing stands at just 277.94 billion yuan, just 9% of last year's total and the lowest level since 2008.

Companies' reluctance to issue bonds is largely down to higher borrowing costs. Market interest rates have been rising steadily in China this year, ever since the country's central bank began a crackdown on heavy borrowing by investors to speculate on assets, by raising key short-term interest rates twice in the spring.

The People's Bank of China raised short-term rates again Thursday, just hours after the Federal Reserve's latest rate rise, pushing the cost of benchmark seven-day loans to 2.50% from 2.45%.

As the campaign against excessive leverage has intensified, the yields on both Chinese government bonds and corporate bonds have risen to about three-year highs: Bond prices fall as yields rise. The yield on China's benchmark 10-year government paper is now 3.94%, the highest among the world's major economies and about a percentage point higher than at the start of the year.

Aside from weak bond issuance this year, a record 745 Chinese companies have delayed or canceled a total of 596.3 billion yuan in planned new bonds, up from 613 companies and 540.5 billion yuan last year, according to Wind Info.

"As the authorities intensified a campaign to reduce financial leverage and tighten regulatory scrutiny, rising market interest rates have inevitably caused many companies to cancel or delay their bond sales," said Cai Hao, a Shanghai-based economist at Hengfeng Bank.

Even when companies are able to issue bonds, they are being forced to pay higher interest costs. Guirenniao Co., a sportswear maker based in China's southeastern Fujian province had to pay investors 7.30% when it issued 300 million yuan ($45.3 million) worth of 270-day corporate bills late last month. Back in April, it sold the same type of bills at a 6.50% yield.

"Guirenniao...thought it couldn't wait anymore, for fear that borrowing costs might become even more expensive," said an investment banker who helped underwrite the recent bond sale. "For private companies like that, the bond rates they are paying at are already higher than bank-loan costs, but of course it's not that easy for them to get the banks to lend to them."

The company this week postponed a planned three-year U.S. dollar bond sale due to a lack of investor interest, although it offered a high 9.5% coupon rate for the bond. Guirenniao representatives couldn't be reached for comment.

Wind Info data shows the Chinese bond market's remarkable contraction has cut its share of overall funding in the world's second-largest economy to a negligible 2.1% so far this year. That is down from last year's 16.9% and its peak of 19.1% two years ago.

The return of the banking sector's dominance over financing China's vast economy is the result of a major policy rethink by Beijing that began after a destabilizing stock market crash two years ago, analysts say.

Despite an early pledge to give markets more say in the economy, President Xi Jinping has increasingly relied on socialist-style state intervention to manage everything from steel and coal output to the Chinese currency's value.

"The policy priority has clearly shifted to risk prevention, instead of reforms and boosting efficiency," said Mr. Deng of JZ Securities. "Recent rhetoric from the authorities has created the impression that bank lending serves the real economy while bonds are used for adding leverage."

The resurgence of the banking sector could make life tougher for China's struggling private enterprises with limited access to bank loans, analysts say.

State-run firms typically need to pay 25% more than the central bank's benchmark lending rate to get a loan, compared with 70% more for a private company, said a senior executive at Bank of China in the southern coastal city of Shantou.

"At the end of the day, we are a state-run bank and our priority is to serve state-run companies," said the executive.

Manju Dalal in Singapore contributed to this article.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

December 14, 2017 02:12 ET (07:12 GMT)