SME bond scheme to be tested online

An online simulation to test the sale of private bonds issued by small and medium-sized enterprises (SMEs) will be carried out this Saturday, the Shenzhen Stock Exchange announced recently, indicating the country will soon see the first batch of the long-waited bonds, experts told the Global Times.

"We expect the country to launch a pilot version of the SME private placement bond program before the end of this month in selected cities, as the basic framework for such a program has already been established," Shi Lei, a senior bond analyst from Ping An Securities, told the Global Times.

Along with the upcoming online simulation, which will outline procedures for investors to register and transfer their SME bonds, regulators are working on wrapping up the preparation work for the program's official launch. On Tuesday, the Securities Association of China (SAC) began reviewing applications from 21 securities traders seeking to underwrite privately placed SME bonds. On May 22, the Shanghai and Shenzhen stock exchanges also released their own respective regulations for upcoming trial sales.

The first batch of SME bonds is expected to be welcomed by both issuers and buyers, said Shi. "The bonds will provide SMEs with an important new source of financing. The market, flush with liquidity, is longing for investment vehicles with high return rates," Shi said, adding that the yield of the initial wave of SME bonds is expected to be around 10 percent.

The Wenzhou-based SME Association has selected 20 local SMEs to recommend to underwriters, Zhou Dewen, the association's president, said in a study of the prospective bonds that was held Monday in Wenzhou, the city where the pilot program is expected to take place.

However, Zhang Yongmin, general manager of Qilu Securities Co, said that without a party to bail out bond issuers and investors they borrow from, these new, highly-risky products may gradually lose favor with the market.

"Generally, the first batch of a new financial product will be of relatively high quality thanks to tight scrutiny from regulators. However, it will be hard to guarantee the quality of the bonds issued later. After all, the market's entry threshold is quite low," Zhang said.

Essentially, any non-property and non-financial SME can issue private placement bonds regardless of their assets or profitability, according to regulations issued by the two exchanges.

As there is an unwritten rule in the market that underwriters have to bail out the bonds they sell, both securities traders and investors would suffer if bad debt proliferated, Zhang said. "The development of the product will be limited unless a guarantee product or agency is established to ease concerns," he said.