Central Bank to Provide $1.4 Billion to Support Bond Market

* In addition, China’s securities regulator is working on launching exchange-traded credit risk mitigation tools

* But the market has doubts about how much the credit risk mitigation tools could bolster corporate bonds

China is stepping up stimulus measures as fears of slowing growth in the world’s second-largest economy put pressure on domestic and global stock markets.

The People’s Bank of China (PBOC) plans to provide 10 billion yuan ($1.4 billion) to China Bond Insurance Co. as credit support for debt sales by private enterprises, Caixin has learned from several sources close to the central bank.

The central bank decided to use the bond market to bolster private-sector financing because it is relatively open and transparent and can guide expectations, said Xu Zhong, director general of the PBOC’s research bureau.

“This will send positive signals to the market, boost confidence in investing in private-enterprise bonds, prevent contagion between falling share prices, bond defaults and declining credit, and eventually drive the revival of financing for the private sector,” Xu wrote in an opinion article.

But the market also has doubts about how much the credit risk mitigation tools could bolster corporate bonds. With a total of nearly 4 trillion yuan of private corporate bonds, the 10 billion yuan of credit support might be only a drop in the bucket, analysts said.

The bond-insurance plan came on top of measures announced Monday to add 150 billion yuan of relending and rediscount quotas targeting the financing needs of micro and small businesses, following an earlier 150 billion yuan of similar quotas issued in June.

The central bank will provide initial funds through relending, which is extending credit lines to banks which relend the money to customers. Professional financial institutions will be authorized to undertake specific operations using a market-oriented approach, such as credit risk mitigation warrants (CRMWs) or debt guarantees to support bond issuance by private enterprises, according to a statement on the PBOC website.

The PBOC statement didn’t elaborate on details of the professional financial institutions. Caixin has learned that the central bank is considering providing credit expansion through its own platforms since there are few credit insurance providers other than China Bond Insurance Co.

In addition, China’s securities regulator is working on launching exchange-traded credit risk mitigation tools. The Shanghai Stock Exchange said it is researching new products to help insure corporate bond buyers against potential default losses.

CRMWs, a Chinese financial product similar to credit default swaps, were originally devised in 2010 but until recently were mainly used for bonds issued by financial institutions or state-owned enterprises. Credit default swaps are a form of credit insurance contract.

With a record amount of bond defaults among private issuers this year, the first two CRMWs targeting private enterprises were created. Last week, China Bond Insurance sold two CRMWs for the ultra-short-term bonds issued by private investment firm Zhejiang Rongsheng Holding Group and by cement maker Hongshi Group.

The CRMWs helped lowered the two companies’ bond issuance costs. Rongsheng sold its 270-day bond at an issuance rate of 4.96%. Without the support of CRMWs, a rate as high as 8% or 9% wouldn’t attract buyers, a bond investor told Caixin.