Easing a chronic lack of funding is seen as crucial to the anticipated acceleration in the development of the country's some 2 million private companies, which now contribute about one-third of China's gross domestic product.

The regulation under review proposes a looser approval system and it substantially lowers the threshold by scrapping issuer size requirements and the stipulation that the issuer should have been profitable for the previous three years, sources said.

Issuers will also be allowed to invest the proceeds in projects other than fixed assets, and more funds will be allowed and bond exchanges created to trade corporate bonds.

Wang Yuanhong, senior analyst with the State Information Center, said a more encouraging sign that the situation is improving for private companies is that the proposed new regulation does not classify issuers into "central enterprises" and "local enterprises," terms implying State ownership and used in the old regulation.

Wang said the environment for private enterprises issuing bonds "will be better. But it still remains on a trial basis. And both sides (regulator and issuer) will be cautious."

Already, 20 small private enterprises based in northwestern Beijing's Zhongguancun, a technology incubator area, are reportedly planning for a bond flotation worth 800 million yuan (US$96 million).

But Wang said that credibility remains an obstacle for relatively small private firms and that early issuers would be confined to well-known brand names.

China's corporate bond market lags far behind its stock market and has been dominated by State-owned companies. Bond issues picked up last year but were still limited to State-owned conglomerates such as the telecom carrier China Mobile Communications Corp.

Private entrepreneurs, however, remain lukewarm. The stock market is still more appealing with its high price-to-earnings ratios, and private companies have yet to find projects that can generate enough profits to pay higher interest rates than bank loans, analysts say.

Analysts have been calling for measures to speed up the growth of the bond market to prevent risk, diversify portfolios and promote financial innovation.

China's outstanding corporate debt stood at around 50 billion yuan (US$6 billion) at the end of last year, less than 1 percent of the year's gross domestic product, while many developed countries have a level exceeding 100 percent.

(China Daily January 7, 2003)