China’s deleveraging campaign is expected to continue unabated in 2018, as well as place greater emphasis on the use of direct financing channels as an alternative to debt-based fund raising.
Given the heavy emphasis placed by China’s recently convened Central Economic Work Conference on the themes of risk prevention and deleveraging, market observers expect Beijing’s ongoing campaign against breakneck debt growth to maintain its momentum in 2018, as well as provide an opportune window for the expanded use of direct financing.
“There are two dimensions to deleveraging,” said the executive of one Shanghai-based asset management firm to 21st Century Business Herald. “One is micro-economic deleveraging, which involves reducing the debt-asset ratio of companies by raising equity percentages.
“The other dimension is macro-economic, and involves shifting the financing supply towards capital markets, and reducing the financing risk of the banking system.”
The Chinese central government signalled earlier this year at the National Finance Work Conference that it would give greater priority to direct financing, as part of efforts to a create a “fully functional…multi-tier capital market system.”
China’s finance system has long been dominated by its banks, the largest of which are state-owned and heavily beholden to policy imperatives as opposed to the wants of the free market.
Industry observers point out that the widespread changes to the IPO approval process this year serve as a clear sign of efforts to improve direct financing channels, with a more rapid rate of approval as well as increasingly stringent approval standards.
“This year’s IPO policies…have been of benefit to fund-raising by means of listing for high-quality companies,” said one Shanghai-based investment banker to 21st Century Business Herald.
“One of the current directions is reduced review periods…while in the past the queue time was potentially 1 – 2 years, now the expected review period can be gradually reduce to 6 – 7 months.”
Growth in the issuance of asset-backed securities by Chinese companies in 2017, as well as the expanded issuance convertible bonds, also serves as a sign of efforts to expand direct financing channels.
As of 14 December a total of 84 listed companies were waiting for the approval of their convertible bonds, accounting for 34.71% of total re-financing.
According to fixed-income analysts an increase in structured notes is a sign of the ongoing expansion of direct financing tools.
“In terms of price structures and functions, the benchmark products for convertible bonds and exchangeable bonds are equity pledges,” said one Shanghai-based fixed-income analyst.
“However, funds for the latter primarily come from banks, and are considered indirect financing, so the increase in convertible bonds and exchangeable bonds means that this part of demand is now shifting towards direct financing.”