China's Opens Corporate Bond Issuance Marketto Foreign Banks
Eiichi Sekine
Senior Analyst,
Nomura Institute of Capital Markets ResearchI.

Issuance of financial bonds

On 20 May 2010, the Bank of Tokyo-Mitsubishi UFJ (China), the Chinese
subsidiary of the Bank of Tokyo-Mitsubishi UFJ, issued two financial bonds on
China's interbank market for a total of RMB1 billion (about ¥13.5 billion)1, marking
the first issuance inside China of a yuan-denominated bond by a foreign bank'sChinese subsidiary (Figure 1).
These bonds, issued for a two-year term with a floating rate based on the five
trading day average for 3-month Shibor2 (the coupon was 2.43% at issuance), wererated AAA within China. Investors in the issue were primarily institutional investors
who participate in the interbank bond market, and the funds procured must be usedwithin China. Accordingly, the yuan procured was not transferred from the bank's
Chinese subsidiary to its main branch in Japan.
The lead underwriter of the bond issue was the Bank of China, with 12 othercompanies participating in the underwriting, including three securities firms: theforeign capitalized BOC International (part of the Bank of China group) and two
purely Chinese firms, Ping An Securities (the Ping An group) and Haitong Securities.
China has been gradually opening its issuance market to foreign firms. Examplesof issues by nonresident entities include three Panda bond issues (yuan-denominatedbonds issued by nonresident entities) from the International Finance Corporation(IFC) and Asia Development Bank (ADB) since 2005, and, from resident entities, asecuritization of auto loans issued by GMAC-SAIC Automotive Finance in 2008. The
prohibition on the issuance of yuan-denominated bonds by the Chinese subsidiaries offinancial institutions in Hong Kong was lifted in 2007, and the Chinese subsidiaries offoreign banks issued yuan-denominated bonds in Hong Kong in 2009.
The prohibition on the domestic issuance of yuan-denominated bonds by theChinese subsidiaries of foreign banks was formally lifted with The Opinions
Regarding the Current Use of Financing to Spur Economic Development (Thirty12

Conversion to yen based on RMB1=¥13.45, the mid-rate on 20 May 2010.
Shibor stands for Shanghai Interbank Offered Rate.

1Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 1: Bank of Tokyo-Mitsubishi UFJ (China) issues financial bonds
ItemIssuance dateIssuance amountIssuance term
Issuance yield
Credit rating
Use of proceeds

Details
20 May 2010
Rmb 1 billion
2 years
2.43% when issued
Five trading day average for 3m Shibor
AAA
Limited to use in China

RoleCompany
Lead manager
Bank of China
Underwriting institution Industrial & Commercial Bank of China, Agricultural Bank of China
China Merchants Bank, China Minsheng Banking
Shanghai Pudong Development Bank, Jiangsu Bank, Bank of Nanjing
China Development Bank, Government Savings Bank
BOC International, Ping An Securities, Haitong Securities
Rating agency
Shanghai Brilliance Credit Rating & Investors Service Co., Ltd. (SBCR)
Accounting firm
Deloitte Touche Tohmatsu CPA
Law firm
Zhong Lun Law Firm
CustodianChina Government Securities Depository Trust & Clearing Co. LTD (CGSDTC)

Note:
Source:

The issuer was the Chinese subsidiary of the Bank of Tokyo-Mitsubishi UFJ's
Chinese subsidiary.
Nomura Institute of Capital Markets Research, based on offering materials from theBank of China

Opinions on Financing) issued by the State Council on 8 December 20083, and furtherconfirmed with the set of opinions issued by the Shanghai City government on theconcept of a Shanghai international financial center4 on 8 May 2009.

II. Status of China's corporate bond market
1. Continued growth in China's corporate bond market since 2008
Both the primary and secondary markets for corporate bonds in China areseparated into exchange-traded markets and OTC markets (the interbank bond market
and over-the-counter market), as shown in Figure 2. The supervising entity and rules
differ depending on the issue.
Issuance in China's corporate bond market in 2009 totaled RMB1.6599 trillion(¥22.5 trillion)5, including, in the interbank bond market, RMB461.2bn of commercial
345

See Eiichi Sekine, Chuugoku no Kin'yu Sanjuujou Iken wo Tsujita Shihonshijo Kaikaku(China's thirty-point financial blueprint calls for further capital market reform), China
Capital Markets Research, Spring 2009 (in Japanese).
See Eiichi Sekine, Chuouseifu no Shouninn wo Ukete Ugoki dashita Shan'hai Kokusai
Kin'yu Sen'taa (Shanghai International Financial Center plan approved by the centralgovernment), China Capital Markets Research, Summer 2009 (in Japanese).
Conversions to yen in this section based on RMB1=¥13.55, the mid-rate on 31 December
2009.

China's Opens Corporate Bond Issuance Market to Foreign Banks2

Figure 2: Composition of China's bond market
OTC market

Exchange market

CGSDTC(General custodian)

Sub custodian ：State-owned commercial bankMarket TypeSub custodian: CGSDTC(CGBs, enterprise bonds, corporate bonds)

CustodianCommercial bank OTC bondmarket

Interbank bond market

Stock exchange bond market

Markets ofTransaction

Bid-AskingNegotiating

Match making

Exchange
pricing

Institutional investors(excluding financial institutions),
individual investors

Institutional investors

Institutional investors(excluding banks), individualinvestors

Marketparticipants

Source: Nomura Institute of Capital Markets Research, based on data from ChinaBond

Figure 3: Issuance amounts in corporate bond market
Short-term finance bonds(CP)
Medium term notes(MTN)
Enterprise bonds
Corporate bonds
Convertible bonds
Asset backed securities(Interbank bond market)
Asset backed securities(Stock exchange market)
Collective bonds
Panda bonds
Total20052006

2007(RMB billions）
2008
2009

142.4

292.0

334.9

433.2

461.2

0.0
69.4
0.0
0.0

0.0
101.5
0.0
14.3

0.0
175.2
11.2
23.2

173.7
236.7
28.8
77.3

690.0
425.2
73.5
7.7

7.2

11.6

25.8

30.2

0.0

0.6
0.0
2.1
221.7

4.8
0.0
0.9
425.0

0.0
0.0
0.0
570.4

0.0
0.0
0.0
979.8

0.0
1.3
1.0
1,659.9

Source: Nomura Institute of Capital Markets Research, based on data from Wind Information

paper (CP), RMB690bn of medium-term notes (MTN), RMB1.3bn of collectivebonds (issued jointly by smaller firms), and RMB1bn of Panda bonds, and on theexchange bond market, RMB425.2 billion of enterprise bonds, RMB73.5 billion ofcorporate bonds, and RMB7.7 billion of convertible bonds. This set a new record high,surpassing the RMB979.8 billion of issuance in 2008 (Figure 3). This also marked
two consecutive years (2008 and 2009) of bond issuance being higher than equity
finance (domestic and overseas combined), which totaled RMB685.8 billion (about¥9.3 trillion) in 2009.
The growth in the corporate bond market since 2008 can be attributed in part to theeasing of regulations governing issuance in the interbank bond market 6 . The firstround of deregulation, spurred by the introduction of MTNs in April 2008, was a
6See Eiichi Sekine, Chuugoku no Shasai Hakko Seido Kaikaku (Reform of China's rules
governing corporate bond issuance), China Capital Markets Research, Spring 2009 issue(in Japanese).

3Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

change in rules requiring that issuance of MTN and CP be subject to examination bythe People's Bank of China to simply a requirement to register that issuance with aself-regulatory organization (SRO) that was established in September 2007. The
second round was a change from each issuer having to apply and gain approval tomerely a confirmatory registration process within preset issuance parameters. Thirdly,
statutory minimum net asset requirements were removed, which opened the way for adiversification of issuers.

2. Extent of development of the corporate bond market: China vs. elsewhere inAsia
The volume of issuance in China's corporate bond market has in fact been growing,particularly since 2008, but how does it compare with issuance volume in other Asianmarkets relative to economic size?
The March 2010 edition of the Asia Bond Monitor, a quarterly publication of theADB, ran a comparison of the local currency-denominated bond issuance outstanding(both government and corporate bonds) in each of the major Asian countries relativeto GDP. At end-2009, outstanding issuance of corporate bonds was only 9.2% of GDPfor China, below that for Korea, Malaysia, Singapore, and Thailand (Figure 4). For
China's corporate bond market to grow to a level commensurate with the size of its
economy, China must pursue reforms aimed at creating a deeper, more liquid market.

Figure 4: Local currency-denominated corporate bond issuance outstanding
relative to GDP in the major countries of Asia

China
End-2008
Hong Kong
End-2009
Indonesia
Korea
Malaysia
Philippines
Singapore
Thailand
VietnamJapan
010203040506070(％）

Source:Nomura Institute of Capital Markets Research, based on the March 2010
issue of the ADB's Asia Bond Monitor

China's Opens Corporate Bond Issuance Market to Foreign Banks

4

III. Diversification of issuers and the new participation offoreign issuers
1. Prohibition on issuance of financial bonds by nonbanks is lifted
One of the most important reforms needed for China's corporate bond market is afurther diversification of issuers in the primary market. Although there has yet to be
any issuance as a result, on 18 August 2009 the People's Bank of China and the China
Banking Regulatory Commission (CBRC) lifted the prohibition on the issuance offinancial bonds on the interbank bond market by the financial lease companies andautomobile financing companies (in both cases Chinese subsidiaries of foreign firms)
whose establishment was authorized by the CBRC.
To be eligible to issue bonds, a company must meet the minimum capitalrequirements of RMB500 million for finance lease companies and RMB800 million
for automobile financing companies, and must also have reported a profit for the past
three years.
The CBRC has authorized 13 financial lease companies (Figure 5) and 10
automobile financing companies (Figure 6). The financial lease companies include aUS subsidiary (Bank of America) and the automobile financing companies include
two Japanese subsidiaries (Toyota Motor and Nissan Motor). Bank loans are the only
option for financial lease companies or automobile financing companies to procure
outside funding, whether they are capitalized domestically or by a foreign firm.
Figure 5: The major financial lease companies authorized
by the CBRC (by total assets)
Financial leasing company

Total assets
Capital(RMB billions) (RMB billions)Shareholder
composition

Shareholder composition(detailed)

1 CDB Leasing Co., Ltd.

30.3

8.0 Chinese side (100%)

2 China Huarong Financial Leasing
Co., Ltd.
3 Industrial and Commercial Bankof China Leasing
4 Jiangsu Financial Leasing Co.,Ltd.
5 Hebei Financial Leasing Co., Ltd.
6 Shanxi Financial Leasing Co., Ltd.

21.6

2.0 Chinese side (99.9%)

China Development Bank
HNA Group
Avic Xi'an Aircraft Industry (Group) Company Ltd.
China Huarong Asset Management Corporation (99%)

11.6

5.0 Chinese side (100%)

Industrial & Commercial Bank of China (100%)

n.an.a Chinese side (100%)

n.an.a

0.5 Chinese side (100%)
0.5 Chinese side (100%)

7 China Merchant Bank FinancialLeasing Co., Ltd.
8 Minsheng Financial Leasing Co.,Ltd.
9 China National Foreign Trade
Financial & Leasing Co., Ltd.
10 CCB Financial Leasing Corp. Ltd.

n.a

2.0 Chinese side (100%)

Jiangsu Communications Holding Co., Ltd.
Bank of Nanjing
n.aShanxi International Electricity Group Co., Ltd.
Shanxi Jintong Investment & Management Co., Ltd.
n.an.a

3.2 Chinese side (100%)n.a

0.5 Chinese side (100%)

n.an.a

4.5 Chinese side (75.1%)
Foreign side (24.9%)
2.0 Chinese side (100%)

China Minsheng Banking (81.25%)
Tianjin Port Free Trade Zone Investment Co., Ltd. (18.75%)
China Minmetals Corp. (50%)
China Orient Asset Management Corp. (50%)
China Construction Bank (75.1%)
Bank of America (24.9%)
Bank of Communications (100%)n.a0.5 Chinese side (100%)

China Great Wall Asset Management Corporation (100%)

n.an.a Chinese side (100%)n.a

11 Bank of Communions Finance
Leasing Co., Ltd.
12 Xinjiang Great Wall Financial &Leasing Co., Ltd.
13 Sichuan Financial Leasing Co.,Ltd.

Source:5

Nomura Institute of Capital Markets Research, based on local news reports and eachcompany's website

Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

Figure 6: The major automobile financing companies authorized
by the CBRC (by total assets)(Foreign side)(Chinese side)

1 GMAC-SAIC AutomotiveFinance Co. Ltd.

Company

GMAC (40%)

Shanghai Automotive Group Finance
August 2004
Co. Ltd. (40%)
Shanghai General Motors Co. Ltd. (20%)

2 Volkswagen Finance (China)
Co. Ltd.
3 Toyota Motor Finance (China)
Co., Ltd.
4 Ford Automotive Finance(China) Ltd.
5 DaimlerChrysler Financial
Services
6 Volvo Financial Services
7 Dongfeng Peugeot-Citroen
Auto Finance Co.

Volkswagen

Wholly owned subsidiary

September 2004

Toyota Motor

Wholly owned subsidiary

January 2005

Ford

Wholly owned subsidiary

July 2005

Daimler Chrysler

Wholly owned subsidiary

November 2005

VolvoCitroen (25%)

Wholly owned subsidiary
BOC Insurance (50%)
Dongfeng Peugeot Citroen Automobile
Co. Ltd. (25%)
Dongfeng Motor Group Co., Ltd. (35%)

July 2006
July 2006

Wholly owned subsidiary

December 2007

Chery Automobile Co., Ltd. (80%)
Huishang Bank (20%)

June 2008

8 Dongfeng Nissan Auto Finance Nissan Motor (65%)
Co., Ltd.
9 Fiat Auto Financial Services
FiatLtd.
10 Chery Huiyin Automobile-Finance Co.

Source:Date establishedOctober 2007

Nomura Institute of Capital Markets Research, based on data from the Almanac of
China's Finance and Banking and various other sources

Foreign firms are limited to capital brought in from the home country and yuandenominated bank loans obtained locally. Increases in capital require approval by theCBRC and hence cannot be done flexibly, while local borrowing is affected byvolume restrictions put in place by the monetary authorities during periods ofmonetary tightening. Allowing these nonbanks to issue bonds provides them a greater
range of funding options, promotes business investment by way of equipment leases,and leads to growth in the production and sale of automobiles by making it easier to
get an automobile loan, all of which should contribute to sustained growth in China's
economy through the expansion of domestic demand.

2. There are also moves underway to allow foreign nonfinancial firms to issue
bonds
According to preliminary figures published by the United Nations Conference on
Trade and Development (UNCTAD)7, foreign direct investment worldwide declined
38.7% to $1.0403 trillion in 2009, but the amount of FDI received by China wasnearly flat on the year, only declining 2.6% to $90 billion. Foreign capital has a strong
preference for FDI into China, the nexus of global growth. The Chinese government
has continued to support policies that put a priority on foreign capital, while
reconsidering ways to promote the influx of foreign capital. Consequently, the StateCouncil announced on 6 April 2010 its Several Opinions of the State Council on
Further Enhancing Utilization of Foreign Capital, wherein it proposed a new policy of
selecting foreign capital linked to industrial policy, attracting foreign capital to central
7

Announced on 19 January 2010.

China's Opens Corporate Bond Issuance Market to Foreign Banks

6and western regions of China, and devolving the authority over inbound foreign
capital to regional governments.
These Opinions contained a number of interesting aspects in regards to capitalmarkets. Namely, they proposed a general approach to the use of capital markets
through (1) promoting foreign capitalized strategic investments and M&A, (2)supporting the overseas listings of Chinese firms, (3) establishing with foreign capital(on a trial basis) a small business guarantee company, (4) supporting foreign capital
investment in venture firms and private equity funds, and (5) supporting domestic
stock offerings/listing and bond issuance by foreign firms. Regarding the last of these,
which is especially germane to this paper, it explicitly proposes providing support toforeign-invested firms (Chinese subsidiaries of foreign firms) to publicly offer and list
shares within China and issue enterprise bonds and MTNs, as well as graduallywidening the scope for nonresident entities to issue yuan-denominated bonds in China.
The National Development and Reform Commission and the Ministry of Commerce
are the governmental agencies primarily in charge of administering these Opinions,which position the better use of capital markets as a way to improve the investment
environment.
Excluding Greater China and tax havens, Japan was effectively the largest sourceof FDI into China in 2009 with total investment of ¥4.1 billion (Figure 7), higher thanthe ¥3.7 billion Japan invested directly in 2008. With a rising share of this FDI aimed
at sales in China's domestic market and a consequent rise in the demand of yuandenominated funds, Japanese firms are becoming increasingly interested in using
China's capital markets.
Although there is a distinction between resident and nonresident entities, if theprohibition against foreign nonfinancial firms issuing yuan-denominated corporate
Figure 7: Source of FDI into China by country/region (2009)

RankCountry/region

1Hong Kong
2
British Virgin Islands
3
Japan
4
Singapore
5Korea6
Cayman Islands
7
US
8
Samoa
9
Taiwan10
Germany(reference) EUWorldwide total

Issuance amount$ millions Share (%)
46,075
51.2%
11,299
12.6%
4,105
4.6%
3,605
4.0%
2,700
3.0%
2,582
2.9%
2,555
2.8%
2,020
2.2%
1,881
2.1%
1,217
1.4%
5,068
5.6%
90,033

Notes: 1. Ordered from the highest amount of actual investment.
2. Inbound FDI from Hong Kong and tax havens includes circuitous investments
originating elsewhere.
3. EU data is for 15 countries.
Source: Nomura Institute of Capital Markets Research, based on materials from the Ministryof Commerce

7

Nomura Journal of Capital Markets Autumn 2010 Vol.2 No.2

bonds is lifted, we think it likely, based on the issuance terms thus far for MTNs,
enterprise bonds, and Panda bonds, that (1) issuance maturities will be intermediate tolong-term, i.e., over one year, (2) issuance proceeds will be limited to use within
China, and (3) the brokerage firm will be a foreign capitalized firm with a subsidiaryestablished in China.
There are already 20 foreign banks with Chinese subsidiaries, one of which haveissued the financial bonds referred to in the introduction, and we expect to start seeing
second issues from these banks. Moves toward the diversification of issuers in China'scorporate bond market, and that market's opening to foreign firms, remain interestingareas to keep an eye on. Over the longer term, China will probably need to integrate
its corporate bond market, now divided between stock exchange and OTC markets, inorder to create greater market depth and liquidity.

China's Opens Corporate Bond Issuance Market to Foreign Banks

8