Big Chinese Companies: Bonds without the Banks

Big Chinese companies are taking advantage of newly relaxed regulations to raise funds through bond sales, without big banks, a trend that threatens to eventually erode local banks' longstanding monopoly on corporate finance.

Gemdale Corp., is planning a 1.2 billion Yuan issue, and earlier in August, China Yangtze Power Co., a Shanghai-listed company affiliated with the Three Gorges dam project, announced plans for an eight-billion-Yuan debt sale. Tellingly, Yangtze Power will use the proceeds to, among other things, pay off some of its bank loans. "The large corporations with higher credit ratings will move to direct financing from the capital markets," says May Yan, a bank analyst with Moody's Investors Service in Hong Kong. "There's a big incentive to do so," she says, pointing out that interest rates on existing corporate bonds, often about 3% to 3.5%, are well below current benchmark bank lending rates of about 7%. While bank loans still are the dominant form of finance in China, stock and bond sales accounted for 12% of fund raising by nonfinancial companies in 2006, up from 5.4% in 2003, according to figures from the People's Bank of China. That proportion is likely to increase in coming years, as China's stock markets become more active and the leadership pushes through promised overhauls to the bond market.

Economists say that shift should make corporate fund raising more efficient and help spread its risk onto a broader base of investors, rather than concentrating it in banks. The rise of capital markets nonetheless poses a big challenge for the institutions, which still rely primarily on lending to corporate customers. For instance, at Industrial & Commercial Bank of China Ltd., China's largest bank, corporate loans made up 71% of its loan book at the end of June. Banks like ICBC are already moving to build up a wider range of businesses, such as mortgage lending and wealth management. Yet analysts say they will also need to develop better risk-management skills to handle lending to a customer base that is going to have fewer and fewer big companies. Indeed, that transition could happen even faster in China than it has elsewhere. As global debt markets have expanded in recent years, banks' corporate clients have been made up increasingly of smaller and less-established firms.

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