China must develop its bond market

(Xinhua)
Updated: 2007-03-07 16:08

The underdevelopment of China's bond market needs to be urgently addressed, deputies said at the ongoing "two sessions" on Wednesday.

Chinese Premier Wen Jiabao stated on Monday in the government report that China will speed up the development of the bond market.

Currently, Chinese companies rely primarily on bank loans, foreign investment and capital raised on the stock market for their financing.

China's Premier Wen Jiabao gestures as he finishes his government work report during the opening ceremony of the National People's Congress at the Great Hall of the People inBeijingMarch 5, 2007. [Reuters]

"The current situation is abnormal. A rapidly growing and diversified economy like ours definitely needs more corporate bonds," said Wu Jinglian, a famous economist and member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC)."

The economist said that in mature market economies, corporate bonds are a key method of corporate financing. In contrast to shares, which may be acquired speculatively, corporate bonds represent a stable, long-term source of financing.

Many Chinese companies have insufficient self-financing. Statistics show that over the past decade self-financing, including stocks and corporate bonds, stood at only 10 percent for Chinese firms, as opposed to 70 percent in the United States.

In contrast to some of the world's leading economies, Chinese companies have relied heavily on the stock market rather than the bond market.

Experts said the bond market was encumbered by both red tape and inefficient supervisory mechanisms.

According to Chinese law, domestic companies have to wait as long as a year before being authorized to issue bonds.

"Without a prosperous bond market, China's capital markets will remain immature," said Chen Yaoxian, chairman of China Securities Depository and Clearing.

"The opaqueness of the bond market can make it attractive for illegal funds," said Ni Runfeng, former president ofSichuanChanghong Electron Group Corp.

"Take Wuxi Suntech Power Co. for example. Despite all the money available in the domestic market for corporate financing, the company had to seek out private overseas funds in order to be able to list," Ni said. "If Wuxi Suntech had been able to issue corporate bonds, that would have been a much more satisfactory solution."

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