Exclusive-Shanghai bourse gives bond investors a taste of high yields with new framework, sources say
Fifty-three bonds worth 37 billion yuan ($5.2 billion) have been sold so far under the new mechanism, which was launched quietly as a pilot late last year, said the sources with direct knowledge of the exchange's scheme.
The deals were made possible after the companies under the new framework, which excludes developers and financial firms, were required to make more timely disclosures about businesses, and to bolster measures to protect investors, they added.
The aim is to double the issuance number this year, said the sources.
Underwriters for these deals have been asked to play a more proactive role in creating demand by facilitating trading of the bonds in the secondary market, said the sources, who declined to be named as they were not authorised to speak to the media.
These measures highlight Beijing's efforts to address a mismatch in China's 33 trillion yuan corporate bond market with state enterprises dominating the market.
Currently, private issuers account for just 2.4% of China's credit bond market, compared with 95% for state-owned companies, according to Shenwan Hongyuan Securities.
Beijing has vowed to broaden the financing pipeline for the private sector, which contributes more than 60% of the economic output and over half of tax revenue, especially as it looks to cushion the impact of Sino-U.S. tensions on the domestic economy.
Investors typically do not consider onshore bonds of private firms as an investment option, as they seek safety in notes issued by state-owned enterprises (SOEs) and financial firms, said one of the sources.
At the same time, "investors complain of meager yields" offered by state-backed issuers in a low-interest-rate environment, making the Shanghai exchange's new framework a timely move, said the source.
The 53 companies, including privately owned conglomerate Nanshan Group and electrical equipment maker TBEA Co, offered coupon rates averaging just shy of 3% - and as much as 4% - for their bonds under the new framework, said the sources.
That compares with financing costs of around 2% for big, state-owned issuers.
Details of the new framework have not previously been reported. The Shanghai Stock Exchange did not respond to Reuters' request for comment.
DEFAULT RISKS
The Shanghai bourse arranges frequent virtual and physical roadshows for securities firms, hedge fund houses and wealth managers to better understand the businesses and financial health of the issuers under the initiative, the sources said.
The bourse also pushes brokerages to buy the bonds they underwrite and trade the securities in the secondary market to create demand and whet investor appetite for these issuances, they added.
Despite the allure of higher returns, some of the investors are not very sanguine about the investment option given the uncertain outlook for private business amid sluggish consumer demand in the world's second-largest economy.
Huang Xuefeng, credit research director at Shanghai Anfang Private Fund Co, said his company had bid for some bonds under the new framework, but most of the issuers were not very appealing.
"The coupon rates are not super attractive, especially when the issuer is a private company," Huang said. "One would prefer bonds sold by local government financial vehicles, which have few default risks."
Huang said that coupon rates higher than 5% by private firms would be enticing, but such pricing could betray financial weakness, potentially discouraging investment by risk-averse institutions.
Private companies accounted for 64% of China's bond defaults by value between 2014 and August 2023, according to Shenwan Hongyuan.
Investors in China typically do not flock to low-rated, high-yield bonds, compared to the U.S. where the junk bond market is a key segment and has played a pivotal role in financing tech innovations and leveraged buyouts.
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