Shanghai floats junk bonds to ease credit problems

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Beijing has green lighted private companies to issue junk bonds to raise capital in a bid to bolster flagging output.

Even though China’s GDP has dropped to just over an enviable 7% for most other economies languishing with little or no growth, output is slowing as private firms are constrained by restricted access to capital.

To compensate, Shanghai Stock Exchange is running a limited trial with seven firms that have government permission to issue high-yield bonds to ease credit problems.

Tough rules restrict just who can buy, sell or invest – bond yields capped at four times the official interest rate, which offers 3.25% for one-year fixed deposits.

The expectation is for up to 5 billion yuan issued as high-yield bonds by the end of this year, surging to 100 billion yuan by the end of 2013, and to triple that figure by the start of 2016.

Booking.com

Traditionally, China has suffered from state-run banks pushing funds towards their cronies in state-run firms, starving the private sector of much-needed capital.

This has pushed hordes of small and medium enterprises that are the real drivers of the economy towards shadowy non-official lenders for capital.

In their favour, private businesses employ 8 out of 10 of the work force, so have the clout to lobby the government to resolve their funding problems.

Beijing is testing different ways of raising capital with varying degrees of success.

Besides the foray in to high yield corporate bonds, other reforms, like closer links with private lenders in one province, have failed, often with the criticism they are too low-key, need scaling up or are too local to make a real difference.

Unsurprisingly, China is not a sophisticated capitalist economy. A great deal of private lending goes on between individuals and companies, but is reckoned at 10% or less of debt funding, while more mature Western economies are nearer the 70% level.

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