The People’s Bank of China (PBOC) issued a notice on 7 January 2009 (PBOC Notice No.1, 2009) removing the minimum threshold for bonds issued in the Chinese inter-bank market. This move will allow unlisted enterprises greater access to the emerging corporate bond market and be of particular benefit to many small to medium sized enterprises that previously were excluded from the bond market because of a RMB 500 million (US$73.2 million) minimum issue limit which has applied since 2004.
While the notice only extends to bonds approved by the National Reform and Development Commission (NDRC) and traded on the inter-bank bond market (and not to bonds listed on a stock exchange and which are approved by the China Securities Regulatory Commission [CSRC]), the inter-bank bond market is by far the largest corporate bond market and so should allow many companies greater access to alternate forms of capital.
In another related development, Reuters reported on 8 January 2009 that China’s banking regulator, the China Banking Regulatory Commission (CBRC) has told selected foreign banks that they may underwrite and trade bonds on their own account in the inter-bank bond market on the same basis as local Chinese banks. The development was foreshadowed by a CBRC notice issued on 26 December 2008 (CBRC Notice No 91, 2008) permitting wholly funded foreign banks incorporated in China and sino-foreign joint venture banks to trade and underwrite corporate bonds in the inter-bank market. After an announcement in December 2008 following the conclusion of the fifth US-China Strategic Economic Dialogue it was expected that foreign banks would be allowed to trade bonds in the inter-bank market, both for their customers and their own accounts, but at this stage trading on the account of customers has not yet been formally approved.
The last 12 months have seen significant developments in the opening up of the Chinese domestic bond market. These new initiatives reflect the State Council’s desire to diversify the sources of funding for local companies away from the traditional bank and equity markets.
Other recent developments include the successful Pilot Rules in September 2007 allowing CSRC to approve listed corporate bonds, and detailed rules and guidance notices issued by CBRC relating to issuance of short term commercial paper and medium term notes which were reactivated in October 2008.
While the corporate bond market is still small compared to the bank debt market, these recent developments are important steps in the evolution of a multi-layered debt market.
The views set out in this publication are based on our experience as international counsel representing clients in their business activities in China. As is the case for all international law firms licensed in China, we are authorised to provide information concerning the effect of the Chinese legal environment. However we are not admitted to practice Chinese law and so are unable to issue opinions on matters of Chinese law. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Domestic and Foreign Invested Enterprises (FIEs) in China seeking alternate sources of capital and foreign incorporated banks wishing to underwrite and trade bonds.
Domestic and FIEs to consider whether the new rules apply and consult their advisers. Foreign incorporated banks to ensure they have the right licences.