China's securities companies will be able to issue corporate bonds starting from October 8, the country's securities watchdog announced over the weekend.

This will create a new financing channel for the securities houses, which are having a hard time as their income is shrinking in the bearish stock market while their sources of funding are insufficient.

Allowing qualified securities companies to issue bonds will help them upgrade their financing structure and fund application efficiency and prevent liquidity risks, said a spokesman for the China Securities Regulatory Commission (CSRC).

The commission issued a long-expected regulation on Friday to guide bond issuance by securities companies.

Meanwhile, CSRC is also working with other departments to update rules on borrowing funds using stocks as collateral as well as on inter-bank loans, which will also increase financing sources for securities houses.

The bond regulation, to take effect on October 8, sets certain criteria concerning asset scale, profitability and credit records of the bond issuers and requires them to follow set rules after the issuance concerning information disclosure and proper use of the funds raised.

For example, they need to have a comprehensive securities business license, minimum net assets of 1 billion yuan (US$120 million) and to have made a profit in the past year.

And they must be free of major irregularities over the past two years and equipped with a sound inner control system.

This will narrow down the qualified bond issuers among the more than 120 domestic securities houses to less than 20, analysts said.

"I think the CSRC's policy is aimed at encouraging the bigger and better-operated companies to issue bonds, which will help them become even stronger," said a Ms Ren, secretary of the board of the directors of Guangzhou-based GF Securities, which has net assets of around 2 billion yuan (US$240 million).

"GF is also very interested in bond issuance, although it is too early to tell our exact move before the regulation takes effect," said Ms Ren, who declined to give her full name, adding that the company would closely follow the matter.

"Despite the strict requirements, the threshold and cost for issuing bonds are still lower than those for issuing stocks, especially when the stock market is low," Ren said.

Beijing-based China Galaxy Securities, one of China's biggest securities companies, has been more actively promoting its bond issuance plans.

A company official said it would submit an application when the CSRC is ready to handle the matter. Market sources said Galaxy Securities would issue around 3 billion yuan (US$360 million) in bonds.

According to the CSRC regulation, the term of the bonds issued by the securities firms will range from one year to five years. The bonds can be either issued to the general public and listed in the bourses for trading, or sold only to a limited group of investors, called qualified investors.

While securities businesses hailed the new policy, two of the prime concerns for the regulators and investors alike remain the problems of risk control and transparency.

The CSRC spokesman said the commission had designed strict standards for bond issuers to ensure their payment ability and protect investors' interests.

For example, the volume of bonds to be issued by a securities company cannot exceed 40 per cent of its net assets. And its averaged distributable profits over the past three years should be enough to pay one year's interest on the bonds.

Meanwhile, the issuers should also disclose usage for the funds raised, which cannot be altered at will or used for businesses that are prohibited by the law.

(China Daily September 2, 2003)