China corp bonds coming, ready or not

By Tony Munroe and Charlie Zhu - Analysis

SHANGHAI (Reuters) - China's plans to develop a corporate bond market are moving closer to fruition, but a lack of infrastructure and an obsession with high-flying equities mean it could be years before the market builds critical mass.

Corporate bonds are expected to take off eventually, however, as Chinese companies seek financing beyond stock offerings, which dilute earnings per share, and bank loans.

Investors, especially insurers and pension funds, are also looking for options in addition to stocks, property, government bonds and low-yielding deposits.

"We hope to see smooth development of the corporate bond market," said Mandy Wang, chief executive of JPMorgan's (JPM.N) 49 percent-owned China International Fund Management Co.

"China's capital market only has one leg at the moment," she told the Reuters China Century Summit this week in Shanghai.

Beijing last month shifted the oversight of bond issuance by listed firms to the China Securities Regulatory Commission (CSRC), which also oversees the stock market, in an effort to spur the stagnant corporate bond market.

On Thursday, CSRC Chairman Shang Fulin said the first corporate bond to be issued under the supervision of his agency would reach the market soon.

Market watchers expect the first wave of bonds to come from a prospective pool of about 20 issuers looking to raise roughly 100 billion yuan (US$13.3 billion).

Last year, the powerful National Development and Reform Commission, which previously supervised all issuance of bonds of one year and longer from listed and unlisted companies, allowed them to offer a record 99.5 billion yuan in bonds. Issuers included Three Gorges Dam operator Yangtze Power (600900.SS) and the Ministry of Railways.

Around half a dozen listed firms, including Yangtze Power, Huaneng Power (600011.SS) (0902.HK) (HNP.N), top domestic property developer China Vanke (200002.SZ) (000002.SZ) and rival developer Gemdale (600383.SS), have revealed plans over the past month to raise a combined 25.1 billion yuan by issuing bonds.

The issues are initially expected to be traded exclusively on the country's bourses in Shanghai and the southern city of Shenzhen, market watchers said.

Banks, which come under a different regulator, are expected at the beginning to be banned from trading corporate bonds issued by listed firms -- removing a key source of liquidity.

"Excluding banks from the market would definitely hurt the sale of corporate bonds," said a fixed-income banker at a major domestic brokerage.

STOCKS OR BONDS?

Other hurdles include the absence of an established, independent ratings culture.