China may experiment with high-yield corporate bond issuances, as and when "conditions permit", to help expand financing channels for its cash-starved small- and medium-sized enterprises (SMEs), a senior central bank official said at a corporate bond forum in Beijing yesterday.

Outstanding corporate debt, including both exchange-listed and inter-bank issuances, surged dramatically from 560 billion yuan in 2006 to 2.1 trillion yuan by the end of October this year, said Hu Xiaolian, deputy governor of the People's Bank of China, the nation's central bank.

However, corporate bonds only accounted for 14 percent of all debt issued in China and less than 10 percent of banks' lending by the end of September, Hu said.

State-owned companies were the main issuers of corporate bonds, with most of it financing big infrastructure projects such as the Three Gorges Dam or new rail infrastructure.

High-yield bonds, otherwise known as junk bonds, are considered speculative because they carry substantial default risk. Therefore, Hu stressed the importance of a system to facilitate information disclosure, credit rating and risk management.

China would issue three bundled bonds for non-financial SMEs to raise funds on the inter-bank market next week as part of a "mock" high-yield bonds pilot.

The National Association of Financial Market Institutional Investors (NAFMII), which oversees corporate bond issuances on the inter-bank market, said last week that the issuance size of any SME bundled bond shouldn't exceed 1 billion yuan.

Zhang Jianhua, head of the central bank's research arm, suggested at the forum that regulators should open the high-yield bond market to issues rated BB and above at the preliminary stage.

To support the development of SMEs, the high-yield bonds should ideally mature in three to five years, Zhang proposed.

A deeper corporate bond market will be crucial to making the Chinese yuan a global currency. To see that happen, China's capital markets need to be far more sophisticated and better integrated into the international financial system.

"With a more sophisticated capital market in shape, China may allow foreign investors to issue yuan-denominated corporate bonds in China and the nation may start issuing yuan-denominated bonds in the overseas market," said Zhang.

Policy adjustment is also needed to scrap a legal ceiling that caps public issuance of corporate bonds at 40 percent of a company's net assets to help develop the corporate bond market, said Shi Wenzhao, secretary general of NAFMII.

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