Chinese Groups May Issue Bonds Abroad

China is considering plans to let large state-owned enterprises issue bonds on international markets, a move to help finance the reform of state sector companies into modern, commercial businesses. Foreigners have only limited access to investments in Chinas giant industrial enterprises, as the small number of corporate bond issues have been restricted to domestic buyers.

As part of Chinas transition to a market economy, the government announced last month that some of Chinas top state-owned industrial enterprises would be allowed to issue convertible bonds for domestic investors, a modest step towards privatisation. Chinas cautious reformers are also keen to tap foreign sources of funds but without diluting Chinese ownership of flagship corporations. International bond issues answer the urgent need for fresh capital but maintain control in Chinese hands. The proposals being considered by officials at the State Planning Commission would enable only leading industrial companies with a good record of debt repayment, profitability and asset structure to issue international bonds. An article Wednesday in the China Daily, the official newspaper, confirmed that Beijing will gradually give state firms the right to issue foreign bonds, but gave no timetable for the reform nor any indication of the select group of enterprises entitled to approach foreign investors.

 

Western bankers in Beijing expect Chinese corporate bond issues would be welcomed by foreign investors. A representative of Merrill Lynch, the US bank, said: There is a growing demand for quality Chinese credits. If they [the companies issuing bonds] are in strong shape financially, they will be very well received. Under existing regulations, a small number of financial institutions have been authorised to issue debt overseas, raising $18.7 billion since 1982. Some of the money raised has been redirected into key construction projects and state enterprises, but state firms have been barred from approaching the global markets directly.

Loss-making state-owned enterprises, weighed down by a legacy of inefficient state management and inadequate financial controls, require substantial sums of money to finance fundamental restructuring. Access to international markets would answer one of the complaints of state-owned companies that the bulk of their debts are short-term working capital loans that disrupt long-term reform programmes.

Officials hope that 10-year corporate bonds will make medium-term debt restructuring and financial planning easier for state-owned companies. Complex loan for metals group, Page 38 Copyright Financial Times Limited 1997. All Rights Reserved.