October 08,2008

PBoC Allows Urgent MTN Issuing to Bolster the Market

By Ma Wenluo

China Huadian Corporation (Huadian), a wholly state-owned power enterprise, publicly issued 2 billion yuan worth of three-year medium-term notes (MTN) on October 7. This is the company’s second MTN issue in four months.

Commercial paper under the supervision of central banks has been a powerful tool for the world’s governments to use to aid the markets. Since the bankruptcy of Lehman Brothers, though, the commercial paper market has faced heavy pressure. In the US, as commercial paper has become less attractive to currency market mutual funds and other investors, the Fed announced the establishment of a "Commercial Paper Funding Facility" in order to buy three-month paper without guarantee and asset-backed commercial paper directly from qualified issuers. This mechanism helps to eliminate the risk incurred when qualified issuers are not able to repay investors when they can’t issue new commercial paper to replace old paper that has come due, and therefore attracts investors back to the commercial paper market.

Huadian’s second issue of MTN in 2008, just two days after the central bank again allowed the issuance of MTN, indicates government efforts to boost the financial market. The central bank first launched MTN in April this year, but suspended it after two months due to opposition from other government agencies, such as the National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC).

This is because in China financing instruments belongs to different supervisory departments. For example, enterprise bonds are mainly issued by big non-listed state-owned enterprises and approved by the NDRC, while corporate bonds are issued by listed companies and are under the supervision of CSRC. MTN are issued on inter-bank bond marker controlled by the central bank, and the buyers are institutional investors such as commercial banks, insurance companies, financial companies, and big enterprises. Since the issuance standard for MTN is much looser than for corporate bonds, 119 billion yuan of MTN were issued within two months. By contrast, only 28.8 billion yuan of corporate bonds have been issued this year. To prevent outside risks from infecting the banking system, the Chinese government doesn’t allow commercial banks to enter the securities market, which restrains the issuance of corporate bonds. PetroChina four months ago applied to issue 40 billion yuan worth of corporate bonds, but approval has not yet been granted.

The State-owned Assets Supervision and Administration Commission, in order to kick-start the market, is encouraging central enterprises to increase their share holdings of their listed sectors, and it is also allowing listed companies to buy back their own shares. The problem is, where does this money come from? The Chinese economy central enterprises?profits are both cooling, resulting in a painful shortage of capital. Moreover, the Chinese government has made it clear that bank loans must not be used to buy shares. CSRC one month ago allowed shareholders of listed companies to raise money by issuing exchangeable bonds (EB), so a large sell off is unlikely to happen in the stock market, but the market capacity for this transaction is very limited.

MTN have therefore become the most realistic and efficient choice. To boost the market, regulatory departments all agreed on their issue. The central bank declared that funds thus raised could be used by a company to buy back its own shares. Despite CSRC’s launch of a short-selling mechanism and margin trading on the stock market, the Shanghai Composite Index has slumped the last three days, mostly due to the influence of ailing neighboring markets. The government can only consolidate its bailout measures by expanding the scale of MTN issuance and making it more rapid. Meanwhile, this will also put enterprise and corporate bonds into an embarrassing position. Will the government respond to the strong appeal of unified bond administration department, unified bond issuance stand, and unified bond trading market? There is still much that China could stand to learn from the US.



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