Money

Foreign banks to underwrite more bonds in China

(Agencies)
Updated: 2010-08-11 17:05

Foreign banks may be allowed to underwrite a wider range of debt on China's interbank bond market as the nation seeks to develop its financial system, the regulator said.

The National Association of Financial Market Institutional Investors said it's working on a mechanism to assess the performance of underwriters and that "local banks and foreign banks will be treated equally." The e-mailed statement Wednesday gave no timeframe for the review and didn't say how many foreign banks may be allowed to underwrite bonds issued by non-financial institutions.

Between five and six overseas banks may be authorized to join state-owned Chinese lenders as underwriters of commercial paper and medium-term notes within months, according to Standard Chartered Plc, which said it is working with the regulator, formed by the People's Bank of China in 2007.

Chinese bond sales surged to 1.96 trillion yuan ($289 billion) last year from 981 billion yuan as the government urged companies to reduce reliance on bank loans, according to data compiled by Bloomberg.

While foreign banks and joint ventures such as Goldman Sachs Group Inc's Gao Hua Securities Co have underwritten financial bonds and securities issued by state-owned enterprises, they haven't had access to the more liquid commercial paper and medium-term notes that are sold by a wider range of Chinese companies and trade exclusively on the interbank market.

'Big' Potential

"The potential is very big," John Tan, Standard Chartered's head of global markets for China, said in a telephone interview from Shanghai late Tuesday. "The amount of bonds being issued in China compared to the size of the economy is not really that large."

The interbank market is the only one where Chinese banks can buy and sell notes, and accounted for 83 percent of bond trading in the second quarter, according to the regulator. More than 3.2 trillion yuan of commercial paper, medium-term notes and other kinds of non-financial debt have traded on the interbank market, China's most-liquid, until the end of June this year, according to Nafmii, as the regulator is known.

Tan said that Standard Chartered, the UK bank that earns most of its profit from emerging markets, submitted its proposed selection criteria to Nafmii, and the process is in the final round of review.

The mechanism "is not ready yet, but Nafmii and its members are accelerating their pace," the regulator said in the statement.

'Step Forward'

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Financial institutions that perform well "may become new underwriters, and incompetent underwriters may exit," it said. "It will be a significant step forward in building an effective financial market."

Overseas firms remain restricted from selling yuan- denominated notes in China, five years after the Asian Development Bank and International Finance Corp, both supranational agencies, sold the first so-called Panda bonds. The regulator said in December Asian companies may be allowed to start sales.

Bank of Tokyo-Mitsubishi UFJ (China) Ltd became the first foreign bank subsidiary to sell yuan-denominated bonds in China in May when it issued 1 billion yuan of two-year notes.

HSBC Holdings Plc sold yuan bonds through its China unit in Hong Kong last year. HSBC Bank China Co joined a group last November underwriting a 5 billion yuan bond issued by Bank of Shanghai Co. It said at the time it was the first locally incorporated foreign bank to help underwrite a financial bond that trades on the interbank market.

"Through our contacts with regulators, we are confident that the bond market will continue to open up," said Tan. Nevertheless, "given their size and network, this market will be dominated by Chinese banks for a long period of time."