12. session 5 jiang prc ppt

ADB-OECD Workshop on Enhancing

Financial Accessibility for SMEs

2013/3/7 Session 5

1

1

The Potency of the SME

Bond Market in China

Shu Jiang

China Industrial Bank

2013.03.07 Manila

2

Regulated by Traded in

SME Collective Note PBOC and

NAFMII

the inter-bank

market

SME Joint Bond NDRC the inter-bank and

exchange markets

SME Private Placement Bond CSRC non - public

offering

Three Types of SME Bond Instruments Regulated by Different Regulators

PBOC: People’s Bank of China

NAFMII: National Association of Financial Market Institutional Investors

NDRC: National Development and Reform Commission

CSRC: China Securities Regulatory Commission



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SMECN has become a rising star

Annual Issuance Volume of SME Joint Bond and

SME Collective Note (billion RMB)

Source: Wind

1.31

0.000.52 0.58

1.42 0.981.27

4.66

6.62

10.60

0

2

4

6

8

10

12

2007 2008 2009 2010 2011 2012

SME Joint Bond SME Collective Note

4

What is SME Collective Note?

SME Collective Note is the main SME bond financing

instrument which allows SMEs with low credit ratings to issue

debt together.

It would be difficult for SMEs to issue debt alone, but a

collective issuance guaranteed by a high-rated guarantor, usually

a government guarantee institution, lifted the credit rating.



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SMECN in detail

One SMECN should be issued by SMEs whose number is

between 2 to 10;

One SME’s SMECN issuance volume is not permitted to exceed

200 million RMB (about 30 million USD). One SMECN issuance

volume is not permitted to exceed 1 billion RMB (about 160 million

USD);

The issuers of one SMECN are always from the same

administrative area and SMECN’s credit rating is enhanced by a

government guarantee institution from the same administrative

area .

6

SMECNs Alreaday Issued

Source: www.chinabond.com.cn

Maturity Credit

Rating

Guarantor

Jiangsu Zhangjiagang

City SMECN 1

3 AA+ Jiangsu Re-guarantee

Corporation

Shanxi SMECN 1 3 AAA China Bond Insurance

Corporation.

Fujian Jinjiang City

SMECN 1

2 AA Fujian SME Re-guarantee

Corporation

Zhejiang Yiwu City

SMECN 1

1 A-1

(highest

short-term

credit rating)

China Bond Insurance

Corporation.

Shanghai Pudong

District SMECN 1

3 AA Shanghai Re-guarantee

Corporation



2013/3/7 Session 5

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SMECNs’ Credit Rating Improvement Mechanism Through Guarantee and Counter-Guarantee/Re-Guarantee

2013 Shandong Qingdao City SMECN1

Source:www.chinamoney.com.cn

Collective Issuers Issuance (Million RMB) Credit Rating

a 40 BBB-

b 20 BB

c 60 BB

Total 120 AAA

Guarantor: China Bond Insurance Co. - AAA

8

SMECNs’ Strength: Credit Rating Upgrading Mechanism Through Guarantee

Source:Wind

SMECNs’ Long-term Credit Rating (%)

52

2023

10

10

20

30

40

50

60

AAA AA+ AA B



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SMECNs’ Strength: Credit Rating Upgrading Mechanism Through Guarantee

Source: Wind, Bloomberg

5

5.5

6

6.5

7

7.5

8

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Average Coupon Rate of SMECN China's One-Year Bank Lending Rate

10

SMECNs’ Strength: Commercial Banks’ Bond

Investment Style

Through guarantee SME collective note in many bond investors’

eyes becomes the bond instrument with higher coupon rate and

without real default risk, thus attracting institutional investors to hold

them to maturity regardless of the SMECN’s market liquidity.

Although there is no collected data about which kind of institution is

the largest holder of SMECN it is reasonable that the rapid

development of SMECN’ owes much to Chinese commercial banks’

bond investment style.



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China’s Bond Market: Bank-dominated

Bond Stock of Major Bond Instruments in China’s Bond Market

At The End of January 2013 (billion RMB)

Source:www.chinabond.com.cn

Government Bond Policy Bank Bond

Balance Percentage Balance Percentage

Commercial Banks 4,790 68% 6,488 82%

Insurance Companies 305 4% 586 7%

Special Members 1,558 22% 14 0.2%

Mutual Funds 102 1% 540 7%

Total 7,064 100% 7,884 100%

: Special Members include PBOC, Ministry of Finance and policy banks etc.

12


Bond Stock of Major Bond Instruments in China’s Bond Market

At The End of January 2013 (billion RMB)

Source:www.chinabond.com.cn

Mid-Term Note Enterprise Bond

Balance Percentage Balance Percentage

Commercial Banks 1,293 51% 739 31%

Insurance Companies 91 4% 498 21%

Special Members 34 1% 7 0.3%

Mutual Funds 863 34% 578 24%

Total 2,526 100% 2,367 100%

: Special Members include PBOC, Ministry of Finance and policy banks etc.



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On one hand unlike insurance companies and mutual funds

which can invest both in stock market and bond market,

commercial banks in China are generally prohibited from trading

and underwriting equity securities and from trading commodity

and financial futures. So China’s commercial banks could only

hold two types of assets: loans and bonds.

On the other hand China’s banking regulators set 75 percent

loan-to-deposit ratio limit for bank lending, which means that

when Chinese commercial banks’ LDRs were near 75% limit

Chinese commercial banks had strong incentives to increase

bond investment.

14


The fact that commercial banks are excluded from stock and

commodity investment and face 75 percent loan-to-deposit ratio

limit makes commercial banks swallow all bonds they can find as

long as their total liabilities are rising.

So what restricts commercial banks’ investment diversification

and lending impetus ensures commercial banks’ dominant role in

bond market.



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China’s Commercial Banks’ Bond Investment Style:

Held-to-maturity

How “Big Four” invest in bonds (%)

Source: Semi-annual Reports 2012

63 6453

46

0%10%

20%

30%

40%

50%

60%

70%

80%

90%100%

ICBC CCB BOC ABC

Held-to-maturity Available-for-sale Recievables Held-for-trading

16

SMECNs’ Strength: Commercial Banks’ Bond

Investment Style

Chinese commercial banks prefer to hold bonds to maturity rather

than trade bonds frequently.

So the possible low liquidity of SME bonds does not prevent

commercial banks form holding them. Since SME bonds have

guarantors’ support and have relatively higher coupon rates

commercial banks are willing to hold them to maturity and prefer

holding SME bonds with guarantee to holding more risky SME loans.



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SMECNs’ Weakness: Too Much Reliance on

Government Support

Government support makes SMECN’s issuance possible and

attracts institutional investors to hold SMECN to maturity, but

government support also makes investors and analysts ignore

issuers’ business and assume that government guarantee institutions

and local governments would not let SMECN fail.

Investors hold SMECN to maturity out of belief in guarantors and

governments not issuers themselves.

18

Disclaimer

This PowerPoint presentation should not be reported

as representing the views of China Industrial Bank.

The views expressed in this PowerPoint presentation

are those of the author and do not necessarily

represent the views or policies of China Industrial

Bank.



2013/3/7 Session 5

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Thank You

12. session 5 jiang prc ppt

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