The second arrow is the support instrument for bond financing by private enterprises, which is
similar to the credit risk mitigation (CRM) instrument. If you major in finance, you will know a
buzzword called CDS (Credit Default Swap), which refers to the insurance against credit default.
In the 2008 Lehman crisis, the reason why AIG, an American insurance company, collapsed was
that it had issued too many CDSs, and the US Department of the Treasury and the Fed had to
bail it out. Consequently, on the financial market,
people may turn pale at the mention of the
CDS. Will issuing too many CDSs lead to new crisis? In terms of this instrument we introduced,
companies issuing CDSs are fairly reliable. At the same time, the design of the entire support
instrument is completely market-oriented, and companies would issue the CDSs and create the
instrument jointly with lead underwriters including commercial banks and securities companies.
Bond buyers can choose whether to buy the CDSs at their own discretion. But with the
insurance, the bonds are exempt from credit risks, which is conducive to bond issuance.
Recently we have successfully issued several dozens of private enterprise bonds with the
volume reaching tens of billions of yuan. Since November this year,
the bond issuance of private
enterprises has been restarted. The support instrument for bond financing has raised the credit
of private enterprises and relieved market anxiety over potential defaults by private enterprises.
Some state-owned commercial banks used to be unwilling to buy bonds of private enterprises as
they were anxious about a possible default. Now they can buy with the insurance. For example,
the yield of a private enterprise bond is 7%, and 1% of it is the premium. Then, an investor who
buys this bond can obtain 6% return on the bond and pay 1% for the premium. If the investor is
audacious enough and do not need the insurance, that is also okay. In this case, all of the 7%
yield belongs to the investor as the instrument we designed is optional.
You can choose to buy or
not to buy. Whether the bond is issued at the rate of 6% or 7% is completely determined by the
market according to the roadshow bidding and book building. In the past month or so, the lowest
premium was only 40 base points, or 0.4 percentage point, which means that this enterprise had
a high credit level, so its premium was relatively low. In the meanwhile, the premium of some
enterprise was 200 base points, implying relatively high risk of the enterprise. Yet, this enterprise
was willing to issue bonds. Why was that? For instance, the bond is issued at an interest rate of
7.5%, of which 2% is the premium. As a matter of fact, the person who buys this insurance can
still get a return of 5.5%, which is quite satisfactory for commercial banks.
Therefore, the design of this instrument is market-oriented. When designing the policy, we must
take into consideration the decisive role of the market in resource allocation and put power under
control. When does power most probably incur problems? One is when you can decide who can
issue bonds and who cannot. In fact, we cannot determine who can or cannot issue bonds since
the decision should be made by the market. The same case goes with the question of who can
or cannot successfully issue bonds. We have adhered to this principle in the design of this
instrument by requiring that the competent authorities must not be involved in the selection of the
company list. This is aimed at limiting the power. There is no such process as review or approval
and no competent authorities determining who can or cannot issue bonds.
The second is when we price the bond issuance and CRMinstruments. What should the interest
rate be? Is it 6%, 7% or 8%? From the perspective of issuers, the lower the interest rate the
better, since they need to pay for interest. Quite the opposite, investors who buy bonds want
higher interest rates so as to secure more returns in this way. But the risk is also higher when
the interest rate goes up. So investors should not only look at the interest rate as once there is
any default, it will be impossible to get their principal back.
Then what is the appropriate level of the interest rate on bonds and the premium? Who should be
the decision maker? The answer is the market. Therefore, relevant authorities should not set the
interest rate or premium. We all know that there should be a lead underwriter to issue bonds, and
it can be a commercial bank or a securities company.
After figuring out the financial condition of
6 / 15 BIS central bankers' speeches
the bond-issuing company, the lead underwriter illustrates it to investors through roadshows, and
invites bids and builds up the book before deciding the interest rate on bonds and the premium.
The third arrow is to study and set up the support instrument for equity financing by private
enterprises, in a bid to alleviate equity pledge risks and stabilize and promote equity financing by
private enterprises.
Now I am going to talk about how to support SMBs and private enterprises. There are many
examples at hand, and they are all about how to help these enterprises obtain loans.
Let me start
by presenting a macro quantity-related concept. We have conducted a survey on SMB loans in
line with the statistical standards of inclusive finance. By the end of this October, over 16 million
enterprises had been granted loans, and this is a rather big number. You can see media reports
saying that the Chinese economy is pretty vigorous, and mass entrepreneurship and innovation
are prospering. China has a population close to 1.4 billion, but do you know how many
enterprises there are in China? I mean those that have officially registered at the industrial and
commercial administration. The rough number of China’s enterprises (including some public
institutions) is 100 million. Currently this number might have exceeded 100 million since it has
been growing very rapidly over the past few years.
