How to secure low-cost financing on the domestic bond market

In the current financial regulatory environment in China, securing finance at the lowest cost is crucial to the existence and development of Chinese companies. In addition to traditional means, such as bank loans, Chinese companies can, under the current legal framework, opt for debt financing on the domestic bond market.

Q: What means of financing on the domestic bond market are available to Chinese enterprises?

A: China does not have a unified bond market and, depending on the regulator, the principal means of financing on the domestic bond market are as follows: (1) enterprise bonds issued with the approval of the national or local development and reform commissions; (2) corporate bonds or small and medium-sized enterprise (SME) private bonds issued following the approval of, or recordal with, the China Securities Regulatory Commission (CSRC) and stock exchange; (3) non-financial enterprise debt financing instruments registered by, and issued through, the National Association of Financial Market Institutional Investors; and (4) wealth management direct financing instruments registered by, and issued through, the China Banking Regulatory Commission (CBRC).

Q: What are the differences between the enterprise bonds of the reform and development authorities and the corporate bonds of the CSRC?

A: The principal basis for the approval of enterprise bonds by the reform and development commissions is the Administrative Regulations for Enterprise Bonds (order No. 121 of the State Council). Pursuant to those regulations, an enterprise in China with legal personality may apply to offer enterprise bonds, provided that it satisfies certain conditions. In practice, the development and reform authorities have issued some specific guiding opinions based on state industrial policy.

Regarding corporate bonds under the charge of the CSRC, pursuant to the Tentative Measures for the Offering of Corporate Bonds, the issuing entities are currently limited to companies listed on the Shanghai and Shenzhen stock exchanges and domestic joint stock limited companies that have issued offshore listed foreign investment shares. However, the CSRC has been moving toward a more relaxed posture vis-à-vis issuing entities. For example, in the Opinions on Further Promoting the Reform of the System for the Offering of New Shares, the CSRC proposes that “enterprises whose applications for an initial public offering of shares are undergoing review may first apply to offer corporate bonds”. And in the Management of the Offering of Corporate Bonds Interim Measures (draft for comment) it also proposes to expand issuing entities (private placement) to all legal persons organised as companies.

Q: What are the distinguishing features of SME private bonds?

A: SME private bonds are a type of bond product launched to implement the Several Opinions on Further Promoting the Development of Small and Medium-Sized Enterprises (Guo Fa [2009] No. 36) and promote the development of SMEs. SME private bonds have four distinctive features: (1) the issuing entities are limited to SMEs (with the Provisions for the Criteria for the Typing of Small and Medium-Sized Enterprises of the Ministry of Industry and Information Technology and three other authorities serving as the standard); (2) they are offered privately to no more than 200 investors; (3) recordal must be carried out with the Shanghai or Shenzhen stock exchange, and they are transferable on the exchange platform; and (4) two or more SMEs may come together to offer private bonds.

The Shanghai Stock Exchange and Shenzhen Stock Exchange have issued tentative measures for SME private bonds and related operating rules.

Q: What types of non-financial enterprise debt financing instruments are there?

A: The term “non-financial enterprise debt financing instrument” is the general term for negotiable securities issued on the interbank bond market by non-financial enterprises with legal personality, which specify that the issuer will repay the principal and pay the interest within a specified period of time. An enterprise that wishes to offer debt financing instruments is required to register with the National Association of Financial Market Institutional Investors; and the debt financing instruments are registered and deposited with, and cleared by, China Government Securities Depository Trust & Clearing. Based on the offering method and different terms, the financing instruments mainly include medium-term notes, short-term financing bills and private targeted debt financing instruments.

Q: Can you give a brief explanation of wealth management direct financing instruments?

A: The wealth management direct financing instrument is an innovative product launched by the CBRC in October 2013, consisting of a combination of “bank asset management plan plus wealth management direct financing instrument”, that is to say that a bank offers a wealth management asset management plan and uses the proceeds to invest in a wealth management direct financing instrument, which finally invests in the project of the enterprises seeking the financing. Wealth management financing instruments are still at the pilot stage among certain commercial banks. In addition to being beneficial in regulating the bank wealth management non-standard debt market, the launch of wealth management direct financing instruments opens a new financing channel for enterprises.

Q: How does an enterprise choose what type of bonds to offer?

A: Each of the above-mentioned bonds has its own scope of application, approval procedure and regulatory requirements. An enterprise needs to select the most appropriate bond financing method based on its actual circumstances. The factors to be considered include: (1) the type of enterprise; (2) the financing term; and (3) the financing costs that the enterprise is capable of bearing, etc.

Furthermore, the bond market in China is in a process of continuous innovation, with new bond products being launched all the time. For example, products with a perpetual bond flavour, such as “renewable bonds”, have recently appeared both in the enterprise bond market and interbank bond market. Although to date their scale has been relatively small, enterprises with a financing need should keep an eye on them.