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Bonds in the limelight as stocks lose their sheen

By Zhou Yan (China Daily)
Updated: 2008-11-18 10:32

China's decision to boost economic growth with more spending on construction and social programs, coupled with falling share prices, may see the bond markets emerging as a major financing channel and spur more mergers and acquisitions (M&As), according to industry experts.

Special coverage: Biz Markets Related readings:  China issues $3.5b book-entry T-bonds  China issues $2.9b bonds for railway construction  China to float 23.38b yuan of three-year T-bonds

"China's real economy is not an isolated island from the ongoing global economic downturn, but we still believe that its impact on the country's capital market is limited, given the country's ample foreign currency reserves and the lower leverage of domestic companies to their foreign counterparts," said Zhang Liping, CEO of Credit Suisse China.

The focus in domestic capital markets will shift toward bonds, rather than initial public offerings (IPO) as it may take longer than expected to bolster sagging market sentiment, say experts.

"What we will see is a strengthening of the relationship between financial products and the bond markets," said Gong Shaolin, chairman of China Merchant Securities.

"In the past two years, the IPO market has been shrinking, forcing more companies to look at bond financing as a way to sustain their businesses," said Colin Law, partner of O'Melveny & Myers LLP.

The market is expected to become more active in the near future considering the lower corporate bond issuance in China at present. China's bond market in 2007 was only $69 billion compared to $600 billion in the US, Zhang said.

Companies have now woken up to the potential of the emerging bond market as a new financing channel having lower costs than IPOs, said Gong.

The burgeoning bond market and the sufficient capital held by Chinese commercial banks are also expected to spur cross-border transactions.

The country's top three lenders hold sufficient capital and have healthy balance sheets, which will provide domestic companies with easier access to loans.

Apart from this as of September, China's foreign exchange reserves have swelled to nearly $1.9 trillion, which will open up new vistas for the cross-border plans, said experts.

Also the central bank's recent move to ease credit norms for commercial lenders will strengthen Chinese firms' plans for overseas M&As, Gong said.

However, experienced investors said that prioritizing long-term development strategies and being in accordance with international norms are important considerations for companies before they decide to go for global M&As.

"Figures showed that over half of our overseas M&A transactions were overpriced. The basic rule for cross-border deals is to assess internal demand rather than the price of transactions," said Song Wenlei, executive director and head of mergers & acquisitions at CITIC Securities Co Ltd.