OPINION

Privately Placed Bonds to Better Fund Small Firms

Small and micro-sized enterprises play a vital role in stabilizing growth, creating jobs, promoting innovation and vitalizing the market at a time when China is in the midst of transforming its economy. Improving financial services to support small businesses is an important task in mobilizing financial resources to prop up the real economy and encourage entrepreneurship.

A plan released by the State Council on August 12 proposed eight ways to better finance small and micro-sized enterprises, which can be summarized in the following three respects.

First, large and medium-sized commercial banks need to allocate more financial support to small businesses. Credit growth for small businesses should be faster than the average level of other loans and should increase yearly, which has become a requirement when measuring banks' performance. As the country carries on its prudent monetary policy and keeps annual monetary credit at reasonable levels, more progress is needed to expand financing for small businesses when invigorating existing loans and boost the ratio of loans to small businesses against total new credit.

Second, small banks and financial institutions should be set up to expand the financing channels available to small businesses. The government should encourage the establishment of village banks and finance corporations in areas where small businesses are concentrated, and promote the establishment of private banks, financial leasing companies and consumer finance companies.

Third, more direct financing channels should be explored for small businesses. The criteria for the access to financing should be lowered for those enterprises that are innovative and rapidly developing. More trials of privately placed bonds for small business should be encouraged.

The first point, which is virtually an administrative requirement for large and medium-sized commercial banks, will be especially effective when the time comes to alleviate downward pressures on the economy. Yet, how long can the impact of administrative provision last?

What's really important is leading private capital toward the legal financial field, which depends on interest rate liberalization. Since small businesses are more capable of sustaining high interest rates than large and medium-sized state-owned enterprises, once interest rates are liberalized, large and medium-sized commercial banks may find small businesses more appealing.

While the first two approaches cannot be carried out immediately due to the fixed timetable of interest rate reform, direct financing is currently the best choice.

The most convenient and feasible way of direct financing is to issue privately placed bonds, which meets the demand of both small businesses and private equities.

Currently, most privately placed bonds lack an investment orientation. Only 10 percent of private equities in the world make money, and they often expect high rates of return on their investments. Small businesses, though thirsty for capital, are in possession of new technology, innovative products and new business models and have a promising future. Therefore, the privately placed bonds of small businesses and private equity need each other.

The government should formulate a set of detailed rules and regulations on the privately placed bonds of small businesses as soon as possible, in order to provide them with real financial support.

This is an edited excerpt of an article by Yu Muzhan, a financial commentator, published in Shanghai Securities News

THE MARKETS

Gold Fever

Gold purchases in China skyrocketed by nearly 54 percent in the first half of 2013, despite contracting demand elsewhere in the world.

The country's gold consumption reached 706.36 metric tons in the first half, up 53.7 percent year on year, the China Gold Association said on August 12.

The strong growth was mainly supported by gold-bar purchases, which surged 87 percent to 278.81 tons, while jewelry gained 44 percent to 383.86 tons.

Industrial use, however, shrank by 1.6 percent.

China was the world's second largest consumer of gold last year, and some analysts say the country may overtake India to claim the top spot this year.

Booming Profits

Industrial Bank, a joint-stock bank based in southeast China's Fujian Province, realized 21.64 billion yuan ($3.53 billion) in net profit attributed to its parent company's shareholders, an increase of 26.52 percent from last year, according to the bank's interim report.

Its per-share earnings increased by 6.92 percent from the same period last year to 1.7 yuan ($0.28) per share.

The bank hit 53.46 billion yuan ($8.74 billion) in operational income in the first half of 2013 with 28.64 billion yuan ($4.68 billion) in operating profits.

The weighted average rate of return on net assets stood at 12.06 percent, down 1.75 percent from the same period last year.

Loans increased by 109.91 billion yuan ($17.96 billion), up 8.94 percent from the beginning of the year.

In addition, non-performing loans took up 0.57 percent of the total, up 0.14 percent from the beginning of the year.

NUMBERS

63.7 %

Proportion of private fixed-asset investment among all fixed-asset investment from January to July

12.11 tln yuan

Fixed-asset investment in the service industry from January to July, a 23.1-percent increase year on year

6.48 tln yuan

Private fixed-asset investment in the service industry from January to July, a 26.7-percent increase year on year

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