A statement issued through the Shanghai exchange's microblog approved seven Chinese companies to issue high-yield bonds via private placements to qualified investors. The bonds may then be bought and sold albeit under highly restricted conditions on Shanghai's fixed-income trading platform.
Issuers, analysts and brokerages who spoke to Reuters were enthusiastic about the launch of the new trial programme.
The new category of bonds offers us a new channel for capital operations, said Xie Hongbo, chairman of Beijing Ninestar Technology Co, an internet service provider which is awaiting permission to raise 10 million yuanthrough 18-month bonds on the Shenzhen Stock Exchange.
It will be quite easy for us to obtain funding that banks are typically reluctant to offer to us small companies.
Analysts expect about 4 to 5 billion yuan in high-yield bonds to be issued in 2012, growing quickly to around 100 billion yuan in the following year.
The market could house more than 300 billion yuan worth of outstanding high-yield bonds by 2015, they said.
An official at Beijing Hongyisifang Radiation Technology Corp, one of the seven firms approved by the Shanghai exchange on Friday, also expressed optimism. The company is preparing to issue 20 million yuan worth of 24-month bonds, he said.
Small and medium-sized firms, which generate around 80 percent of the jobs in China, frequently complain about difficulty in getting bank loans, which is driving some into the massive shadow banking system. State-run banks often channel the bulk of their annual lending targets straight to other state-backed firms.
Prior attempts by the central government to help the private sector raise money have produced inconsistent results.
Beijing recently encouraged banks to direct more money toward private lenders through a high-profile pilot project in Wenzhou, an entrepreneurial hothouse in Zhejiang province which has been hard-hit by the downturn in exports.
However, critics say the Wenzhou reforms are too limited and too localised to make a real difference at present.
The junk bond market may prove more helpful in the near term, analysts say.
For starters, the cost of capital will likely be lower. Unregulated lending rates in Wenzhou have declined since the pilot project was launched, but private borrowers were still paying interest rates near 22% as of May, according to official media.
The new junk bond market, on the other hand, looks to offer capital at a much better rate. Regulators have specified that the high-yield bond yields must not exceed four times the official benchmark interest rate, which now stands at 3.25% for one-year fixed bank deposits.
The paperwork will also be less burdensome.