To implement the guideline of the Party Central Committee and the State Council for supporting the development of private economy and the requirement of "2 Unswerving Points" (Unswervingly consolidating and developing public ownership economy, unswervingly encouraging, supporting and guiding non-public ownership economy's growth), the Shanghai Stock Exchange (SSE) officially landed the 1st bond-financing support instrument for private enterprises on December 14, 2018 under the arrangement of the China Securities Regulatory Commission (CSRC). It aimed to improve the financing environment of private enterprises and promote the development of private economy in a marketized mode and through financial instrument innovation.
It was determined on the Executive Meeting of the State Council on October 22, 2018 to establish a bond-financing support instrument for private enterprises. The People's Bank of China (PBC) would offer initial funding to a professional institution according to law and entrust it, in the principle of market-oriented operation and risk control, with issuing bonds to private enterprises with normal operation but in temporary liquidity difficulty as credit enhancement, thus helping them to relieve the financing difficulty. According to the arrangement of the PBC and the CSRC, they would provide credit enhancement for private enterprises for their bond financing by selling credit protection. The bond-financing support instrument for private enterprises on the exchange-traded market is based on the previous pilot of the credit protection contract for the exchanged-traded market. China Securities Finance Corporation Limited (CSF) will be the implementing agency of the bond-financing support instrument for private enterprises on the exchange-traded market, and it will offer credit protection together with underwriting agencies, with an aim to mainly support the bond financing of private enterprises with good market prospects and competitive technologies. It will give play to the bond market's advantages of openness, transparency and strong guidance, restore the bond-financing channels of private enterprises and support the development of private economy.
This credit protection instrument is co-initiated by CSF and Huatai Securities for Jiangsu Hengtong Optic-Electric Co., Ltd. (Hengtong for short). Hengtong is a private company listed on the SSE, and its corporate credit rating is AA+. On that day, Hengtong successfully issued the corporate bonds (18 Hengtong 01) of RMB100 million by way of bookkeeping, with the issuing rate of 4.9%. CSF and Huatai Securities sold the credit protection contract with the nominal principal of RMB30 million in total to the subscribing agencies; CSF and Huatai Securities respectively contributed RMB15 million. In this way, they could provide private enterprises issuers with credit enhancement support, guarantee their bond issuing, and further reduce issuers' financing cost. On the same day, China Merchants Securities sold the credit protection contract to the corporate bonds of Hailiang Group issued on the same day, thus offering effective support to the private company for its bond financing.
The bond financing support instrument for private enterprises on the exchange-traded market is to support the bond financing of private enterprises through a marketized mechanism, and its main features are as follow:
First, it adheres to the principle of marketization and legalization. Based on the previous pilot experience, it allows market participants to take part voluntarily and negotiate equally. In the specific sectors like the selection of private enterprises, the price forming and the time-limit arrangement, CSF and the market institutions operate in the principle of marketization and make full use of their own advantages. The bond-financing support instrument is mainly of short term and conforms to the financing demand of private enterprises.
Second, it improves the incentive and restraint arrangement and the risk sharing mechanism. CSF and the bond underwriting agency will jointly sell credit protection contracts to share risks in the risk-return equity principle. They can offer credit protection to one target alone or together.
The SSE will release the business rules for credit protection instrument in the near future according to the previous pilot experience, give full play to the instrument's supporting function towards private enterprises and relieve their financing difficulty, thus creating a good financing environment for their development.