PBOC Is Said to Plan 10 Billion Yuan to Help Private Bond Sales

(Bloomberg) -- China's central bank plans to give 10 billion yuan ($1.4 billion) to China Bond Insurance Co. to provide credit support for debt sales by private enterprises, according to people familiar with the situation.

The money is part of the plan the People's Bank of China announced late on Monday to support private firms issuing debt. The central bank didn't provide any details on how the plan would work, its size, or when it would begin. Officials also hadn't responded to multiple requests for comment.

China's announcements on Monday of fresh measures to ease the funding strains of private companies came after top officials commented repeatedly in an attempt to restore confidence in the world's second-largest economy. The central bank reiterated President Xi Jinping's vows to offer "unwavering" support for the private sector, which has been most affected by the government's campaign to curb debt and cut shadow banking. The collapse of stock prices has also hit non-state-owned companies hard, as has the slowdown in economic growth.

It's not clear how China Bond Insurance will provide credit support for issuers with the money, and the company declined to comment when contacted. It provides guarantees for notes sold by small- and medium-sized companies, and also provides insurance for bonds sold by such issuers, similar to credit default swaps.

Companies that guarantee bonds sold in China are able to provide assurances of up to 10 times their current net assets, or 15 times for guarantee companies that mainly serve small and rural borrowers, according to a 2017 rule from the State Council.

Help Avoid Defaults

The new bond support tool isn't just a central bank policy, but an urgent, national-level policy, according to Iris Pang, Greater China economist with ING Groep NV in Hong Kong, commenting on the PBOC's Monday announcement. "More and more companies are going to have payment difficulties on their existing bonds or existing loans," and the new policy "should help avoid systemic default risk in China," she said.

There should be some pilot cases within the next month or so, according to Pang.

The central bank will grant initial funding to financial institutions to offer credit-risk mitigation tools and other credit enhancements that help companies in the private sector sell bonds, according to the bank's statement.

Relending Expansion

In a separate statement on Monday, the central bank also announced a 150 billion-yuan ($22 billion) increase in its re-lending and re-discounting quota. These are tools that allow the central bank to supply financial institutions with money to lend. The quota was also raised by 150 billion yuan in June.

That should be a lifeline for small and medium-sized enterprises, Pang said. "For the SMEs, they are more likely to be exporters, so they are hurt more directly by the trade war."

These measures are a follow-up to the confidence-boosting comments from policy makers last week, and are trying to show they are making good on their promises of supporting the private sector, said Yao Wei, chief China economist at Societe Generale SA in Paris. "If the efforts are sustained, they will certainly be positive to everyone's confidence in long-term reforms, even though they may not lead to a quick, short-term growth rebound."

China's central bank will initially provide funds to professional agencies for them to support bond issuance by private companies, the State Council said after a meeting led by Premier Li Keqiang on Monday. The PBOC will focus its support on companies "suffering temporary difficulties but which have market share, prospects and technological competitiveness," it said in the statement on its website.

--With assistance from Yinan Zhao, Miao Han and Karl Lester M. Yap.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Frankfurt at xpi1@bloomberg.net;Matthew Boesler in Beijing at mboesler1@bloomberg.net;Heng Xie in Beijing at hxie34@bloomberg.net;Zhang Dingmin in Beijing at dzhang14@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

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