China may allow overseas lenders to underwrite more debt

By Henry Sanderson (China Daily)
Updated: 2010-08-12 07:47
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BEIJING - Overseas banks may be allowed to underwrite a wider range of debt on China's interbank bond market as the nation seeks to develop its financial system, according to a statement from the National Association of Financial Market Institutional Investors (Nafmii) on Wednesday.

The association said it's working on a mechanism to assess the performance of underwriters and that "local banks and overseas banks will be treated equally". The statement gave no timeframe for the review and didn't say how many overseas banks may be allowed to underwrite bonds issued by non-financial institutions.

Between five and six overseas banks may be authorized to join State-owned Chinese lenders as underwriters of commercial papers and medium-term notes in months, according to Standard Chartered Plc, which said it is working with Nafmii, formed by the People's Bank of China in 2007.

Chinese bond sales surged to 1.96 trillion yuan ($289 billion) last year from 981 billion yuan as the government urged companies to reduce reliance on bank loans, according to data compiled by Bloomberg.

While overseas banks and joint ventures such as Goldman Sachs Group Inc's Gao Hua Securities Co have underwritten financial bonds and securities issued by State-owned enterprises, they haven't had access to the more liquid commercial paper and medium-term notes that are sold by a wider range of Chinese companies and trade exclusively on the interbank market.

'Big' potential

"The potential is very big," John Tan, Standard Chartered's head of global markets for China, said late on Tuesday. "The amount of bonds being issued in China compared to the size of the economy is not really that large."

The interbank market is the only one where Chinese banks can buy and sell notes, and accounted for 83 percent of bond trading in the second quarter, according to Nafmii.

More than 3.2 trillion yuan of commercial paper, medium-term notes and other kinds of non-financial debt have traded on the interbank market, China's most-liquid, until the end of June this year, Nafmii said.

Tan said that Standard Chartered, earns most of its profit from emerging markets, submitted its proposed selection criteria to Nafmii, and the process is in the final round of review. The mechanism "is not ready yet, but Nafmii and its members are accelerating their pace", the statement said.

Financial institutions that perform well "may become new underwriters, and incompetent underwriters may exit," Nafmii said. "It will be a significant step forward in building an effective financial market."

Bloomberg News

(China Daily 08/12/2010 page13)