China, Reacting to Crisis, Reopens a Debt Market

By ANDREW BATSON

BEIJING -- China's central bank has reopened a nascent market for corporate debt, in its latest move to increase local companies' access to funding and help them cope with a slowing domestic economy and the global financial crisis.

Chinese authorities have picked up their efforts to sustain the nation's fast economic growth as the global credit crisis has worsened and worries about high inflation have faded. At the beginning of August, the People's Bank of China relaxed credit quotas, increasing the amount most banks can lend this year by 5%. Then it cut lending rates in mid-September, a move that came earlier than most economists and analysts were expecting.

China's largely closed financial system has so far been little affected by the credit squeeze in the U.S. and Europe, but authorities are concerned about the impact of slowing overseas demand on Chinese industry.

The central bank's latest decision, which took effect Monday, allows companies to sell local-currency-denominated debt of three to five years' duration after a relatively simple approval process. Historically, the right to sell corporate debt has been tightly restricted in China and the market is dominated by large state-owned enterprises.

The central bank had originally launched the medium-term note market in April, but new issues were stopped in June amid disputes with other regulatory agencies and worries that easy access to the bond issues would undermine authorities' efforts to control the growth of bank credit. A total of 73.5 billion yuan, or nearly $11 billion, in medium-term notes were sold before approvals were suspended.

The central bank also oversees a market for short-term commercial paper -- debt with a term of up to one year -- that has proved popular with the large number of companies unable to navigate the difficult approval process for longer-term bonds. The addition of the medium-term note program provides another alternative to bank loans that should help Chinese companies lock up funding for longer periods and at lower cost.

"Since the interest rates in the interbank market are usually lower than those on bank loans, it will noticeably reduce funding costs for the corporate sector," Merrill Lynch economist Ting Lu wrote in a research report. Earlier this year, companies typically paid interest of 5.3% to 5.5% on three- to five-year debt, compared with 8% to 9% for bank loans, he said.

The central bank said that companies in the energy and transportation sectors would be given priority in approval for medium-term note sales, in an apparent sign of plans to boost funding for those areas. China struggled with severe electricity shortages this summer, and the government is widely expected to increase spending on power and other infrastructure to relieve those strains and help offset slowing export growth.

In a separate statement issued during the weekend, the central bank said, "Authorities have already drawn up plans to avoid and reduce the impact of the U.S. financial crisis on China...We have the confidence, means and ability to maintain China's economic development and financial stability and contribute to the stable development of the world economy."

Write to Andrew Batson at andrew.batson@wsj.com