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Bond market to expand for SMEs

By Wang Fei’er  (Global Times)

08:17, May 24, 2012

The Shanghai and Shenzhen stock exchanges have started a trial program which will allow China's non-listed small and medium-sized enterprises (SMEs) to sell bonds through private placements in a bid to help the nation's cash-strapped private companies broaden their fundraising channels.

According to statements from the exchanges, property and finance-related firms will be excluded from the program, which launched on Tuesday. Participating SMEs will also be required to issue bonds with maturities of no less than one year and interest rates not exceeding three times the benchmark lending rate of the nation's central bank, the exchanges also announced.

The exchanges hope to introduce the first batch of bonds under this program by the end of June at the latest, a spokesperson from the Shenzhen Stock Exchange noted in a press release.

Although the central government has urged banks to set up special funds to support SMEs, and even lowered capital adequacy ratios in order to facilitate more lending to these enterprises, the nation's financial institutions have continued to turn their backs on small firms because of the repayment risks they pose, Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, told the Global Times.

Yet, if China's SMEs are allowed to enter the bond market, this could greatly increase their access to financing and reduce their financial dependence on banks, Dong added.

But while this new program may help alleviate some of the financing woes plaguing SMEs, the market should still be wary about bonds from private firms. "Essentially, this move has redirected the repayment default risks of SMEs from banks to investors," said Hao Yijun, a bond analyst from Guangdong-based China Guangfa Bank.

In order to lure in buyers, SMEs will likely push up the interest rates on their bonds, which will in turn increase their funding costs and further drive up default risks, Hao explained. Moreover, a slowing economy has dented demand and taken a bite out of SME revenues in several sectors, Hao added.

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