PBOC Says New Bond Tool Can Aid Issuance Up to 160 Billion Yuan

(Bloomberg) -- A new credit support tool to assist private companies can help issuance of as much as 160 billion yuan ($23 billion) in new bonds, the People’s Bank of China said.

Speaking at a press conference Friday in Beijing, PBOC deputy governor Pan Gongsheng said the credit support tool announced Monday can have an initial capital value of 10 billion yuan, which can then be leveraged up to 8 times by the China Bond Insurance Co. If that action is matched by other market participants as part of a consortium, then the effect can be twice that -- as much as 160 billion yuan.

“Of course, this is an initial estimate,” Pan said. “We will observe and estimate how the scope works in improving private companies’ financing environment according to the market situation and changes, and then decide whether or not to expand the scope further."

China is struggling to secure funding to private companies this year, the sector most affected by the government’s campaign to curb debt and cut shadow banking. The collapse of stock prices has also hit non-state-owned companies hard, as has the slowdown in economic growth. Bloomberg reported the 10 billion yuan initial value on Oct. 23.

Companies that guarantee bonds sold in China are able to provide assurances of up to 10 times their current net assets, or 15 times for guarantee companies that mainly serve small and rural borrowers, according to a 2017 rule from the State Council.

"With some companies facing defaults, the risk appetite of financial markets and some financial institutions have declined, and the decline has led to a certain herd behavior,” Pan said. “Some private companies with normal operation have also experienced financing difficulty."

Pan said it’s difficult to expect the market to correct the herd behavior on its own, and the bond financing support tool is a "breakthrough" to repair the private sector’s funding ability, also including via equities and bank loans.

Pan added, after the press conference, that the benefits of the financing tool won’t be unrestricted to all sectors, and there will be limits on private companies in property and in industries with overcapacity.

©2018 Bloomberg L.P.