The Shanghai Stock Exchange is offering a new bond issuance framework in line with its goal of stimulating the economy by supporting China’s private sector. According to two sources, this framework aims to encourage more companies to issue bonds and attract investors. Under this mechanism, which was piloted at the end of last year, 53 bonds worth 37 billion yuan ($5.2 billion) have been issued so far.
Under the new regulation, companies operating under this framework, excluding developers and financial firms, are required to provide more timely disclosures about their operations and take measures to protect investors. These measures aim to meet yield expectations by enabling increased demand for bond issuances.
Sources indicated that the goal is to double the number of bond issuances this year.This new framework stands out as a step toward balancing China’s 33 trillion yuan corporate bond market, where state-owned companies dominate the bond market. Currently, private sector bonds account for only 2.4% of China’s credit bond market, while state-owned companies hold 95%.
Investors often turn to state-backed company bonds as a safe haven, but the low interest rate environment and the low yield rates offered by state-backed issuances are prompting investors to seek new opportunities.
In this context, the new framework offered by the Shanghai Stock Exchange is noteworthy for its timing.The Attractiveness and Risks of High-Yield Bonds
Under the new framework, 53 companies offered their bonds with coupon rates ranging from 3% to 4%. These rates appear more attractive compared to bonds of large state-owned companies, as state-owned companies typically have costs around 2%. However, despite private companies promising high returns, investors are cautious about the risks.
Huang Xuefeng from Shanghai Anfang Private Fund Co. stated that his company had bid on some bonds under the new framework, but many issuers were not attractive. Huang added, “The coupon rates aren’t very high, especially if the issuer is a private company,” noting that local government financial instruments carry less default risk.
Nevertheless, private companies offering coupon rates above 5% may attract some investors; However, such pricing could signal financial weakness and deter risk-averse institutions from investing.
Government Support and Investor Security
In conclusion, the new framework offered by the Shanghai Stock Exchange promises higher returns as part of its efforts to increase private sector access to finance. However, the high default rates of China’s private companies and the lower risk posed by state-backed companies stand out as significant factors influencing investors’ decisions. In China, private companies accounted for 64% of bond defaults between 2014 and August 2023.
While this new step offers more diversified investment opportunities, increasing interest in low-rated, high-yield bonds may take time, given China’s investor behavior.
