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China Urged to Introduce ‘Junk’ Debt

China should introduce “junk” bonds to provide smaller private companies with new funding channels as the country develops its debt capital market, a senior Chinese financial official has suggested.

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“It may be a little bit radical, but I think we should promote junk bonds in China,” Guo Shuqing, chairman of state-controlled China Construction Bank, the country’s second-largest lender, told the Financial Times. “But we would probably use a more appropriate name, like ‘innovative’ bonds or ‘high-yielding’ bonds.”

Mr Guo, a former deputy central bank governor, said high-yielding, higher-risk corporate bonds – which are not currently permitted in China – would provide a much-needed source of funding for private start-up and early-stage enterprises, which are generally shunned by the state-dominated banking sector.

His comments come after corporate bond issuance in China rose nearly 87 per cent in 2009 compared with a year earlier, to about Rmb1,575bn ($230bn).

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“We’ve been talking for more than 20 years about developing a proper corporate bond market in China, and we have a good chance now to speed that development up,” Mr Guo said.

Analysts say the jump in corporate bond issuance last year was a result of the government’s stimulus plan and mirrored the rise in new bank loans, which nearly doubled from a year earlier to Rmb9,600bn.

“Because of the need to stimulate economic growth in the face of the financial crisis, the regulators loosened the approval criteria for bonds and allowed a lot more to be sold last year,” according to Qin Long, a bond market analyst at China Merchants Securities.

China’s corporate bond market makes up a small proportion of financing for enterprises. Even with the spike in issuance, bank lending still accounts for 82 per cent of corporate financing; bonds make up nearly 13 per cent and equity markets provide 5 per cent.