China Opens Bond Market

--China allowed foreign banks to trade and underwrtie corp bonds in the country's interbank market --it will scrap min size requirement for interbank-market bond sales, allowing companies to sell less than $500 mil of bonds --China encouraged local firms to tap debt market, instead of bank loans and equity market amid slowing economy --foreign banks were only allowed to be trading government, banks debt and some derivatives. SHANGHAI -- The China Banking Regulatory Commission said Friday that it will allow foreign banks to trade and underwrite corporate bonds in the country's interbank market, widening their reach in Asia's largest fixed-income market outside Japan. Also Friday, China's central bank said it will scrap a minimum size requirement for interbank-market bond sales, creating a new avenue for smaller companies with more modest funding needs to borrow money. The People's Bank of China said it will let companies sell less than 500 million yuan ($73.2 million) of bonds on the interbank market, a move likely intended to ease financing woes of smaller companies. Both moves come at a time when Beijing is encouraging local firms to tap the debt market, instead of relying on bank loans and stock markets for funds amid a slowing economy. The moves also are aimed at developing China's five-year-old interbank corporate-bond market, which suffers from low liquidity partly because of scant investor interest. Foreign banks will no longer need approval from the commission for corporate-bond trading or underwriting, but still will have to report any deals to the regulator's local branches, according to a commission notice seen by Dow Jones Newswires. Previously, foreign banks were allowed to trade only government bonds, central bank bills, bonds issued by financial institutions and some derivative instruments on the local bond market. Foreign banks' bond holdings rose 23% over the year to 117.8 billion yuan at the end of December, accounting for less than 1% in the interbank market. Analysts said they expect the proportion to increase gradually in coming years given Beijing's efforts to ease restrictions on foreign banks' bond investments. According to the latest data from the banking regulator, 71 foreign banks had established branches in China by the end of 2007, including HSBC Holdings PLC and Citigroup Inc. Their assets totaled 1.25 trillion yuan at the time, accounting for 2.4% of assets in China's banking sector. "Some experienced foreign banks are likely to start investing in corporate bonds imminently, as the returns are relatively higher than government bonds," said Mo Fan, a bond analyst at Soochow Asset Management Co. A Beijing bond trader with a local bank said an expansion in corporate-bond investors will help local banks find trading counterparties more easily, as liquidity has been a problem in the local corporate-bond market, especially for some small-sized corporate bonds. Outstanding corporate debt in China totaled 1.268 trillion yuan at the end of 2008, up 66% from the previous year. Corporate bonds account for 8% of China's total outstanding bonds, well below approximately 20% in the U.S. —Wang Ming, Frank Zhang and Terence Poon