China Wants Its Stock, Bond Markets to Step Up Funding Role
(Bloomberg) -- China’s policy makers, faced with a slowing economy and growing pressure on the banking system, have decided it’s time for the nation’s stock and bond markets to play a bigger role in funding companies.
Less than one-quarter of China’s $2.9 trillion of financing last year was from bond and equity issuance, central bank data compiled by Bloomberg show. That’s not good enough, according to senior officials, who are looking for ways to improve businesses’ access to cash without adding too much risk to the financial system.
“We need to create a strong capital market,” Guo Shuqing, the country’s chief financial regulator, said at the National People’s Congress, China’s top legislative session which wrapped up last week. “We could do more work especially in the capital market -- stock market, bond market -- for direct financing.”
China is trying to transform how it funds its economy after decades of relying on state-run banks that benefit from the implicit backing of the nation’s treasury -- but tend to direct most loans to other government-owned companies. The difficulty that small and private firms have in securing funding was one reason for an explosion of shadow-banking, and the rapid increase in debt and risk that came with it.
Spurred to act by a record $34 trillion debt pile, authorities in recent years have cracked down on risky loans, squeezing businesses that relied on such funding. While leaders including Guo have called on the banks to do more to finance private companies, lenders are grappling with their own concerns about loan quality and default rates. Even so, outstanding banks loans in China have increased by about 27 percent since 2016, while capital-market funding rose by around 15 percent.
“We shouldn’t put all the pressure on banks,” Xu Kuijun, an NPC delegate and vice president at Bank of China Ltd. in Shanghai said in an interview at the sidelines of the gathering. “We have to rely more on direct financing, and capital markets should do more.”
Lawmakers gathered for the NPC in Beijing over the past two weeks to lay out policies for the year ahead. Recent measures to boost direct funding include:
- On March 2, regulators finalized rules for a new exchange designed to encourage technology companies to go public. The plans also featured an initial public offering application process that should be speedier and less burdensome than the current system
- Relaxing rules to make it easier for local governments to issue bonds instead of resorting to shadow financing
- Authorities will soon allow quantitative traders to use their own software to automatically execute trades through brokerages. The so-called direct connections have been banned since the 2015 stock market crash
The changes are aimed at increasing the pool of money in equities and bonds as well as stimulating a more active market -- in theory, making it easier for small companies to raise funds.
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The largest banks, acting under the government’s push to ensure a supply of cheap credit to small companies, have already cut lending rates to borderline unprofitable levels despite the higher risk of default, people familiar with the matter previously said.
What NPC Delegates Said
| Yang Weimin, a former vice minister | We need to increase the proportion of direct financing, as the proportion of bank loans is too large |
| Chen Yulu, People’s Bank of China deputy governor | To push forward financial sector supply side reform, we need to create a standardized, transparent, open, active, and strong capital market |
| Xiao Gang, former chairman of the China Securities Regulatory Commission | The current financing structure isn’t good, there should be more direct financing |
Policy makers have also promised to further open the financial sector to the global economy. Authorities are approving majority foreign control for onshore financial services ventures, and the stock and bond trading links with Hong Kong have made it easier for overseas investors to access the domestic market. Index compilers including MSCI Inc. are adding Chinese securities to global benchmarks.
BNP Paribas China Chief Executive Officer CG Lai said that within seven years foreign players will command a large enough share of the local industry to push for meaningful changes, which could help policy makers realize their ambitions.
“We are now at another stage -- financial resources need to spread out to everyday people from state-owned enterprises,”’ Lai said in an interview. “There’s a growing realization that they need to develop bond and equity markets.”
©2019 Bloomberg L.P.