On January 31th, the Chinese government along with the people’s Bank of China, the Finance Ministry and Securities and banking Regulators have agreed on a new financial policy package. An interesting part of lengthy financial policy is a new funding instrument called "epidemic prevention and control bonds," otherwise known as “Virus Bonds”. The government has pledged that these bonds will go through a different approval process that will take just days, rather than weeks, compared to other types of bonds. They also carry yields much lower than on other debt as state baked banks are urged by the Government to buy such instruments. On February 5th, the National Association of Financial Market Institutional Investors (handling the fixed income trading) has announced that they were ready to accept new issuances.
Since the start of February, more than Rmb24bn ($3.4bn) was raised by Chinese businesses by selling “Virus Bonds”. Most of the bonds have a maturity period of less than a year (information provided by Huarai Securities). The main idea behind this financial instrument is the help it should provide for the country to fight against the virus, therefore companies who issue this type of bonds must commit to spending at least 10 percent of their proceeds to combating the epidemic, which has caused numerous deaths and a further decline in the Chinese economy. A good example of what companies can do is selling or producing relevant items for helping the population to fight the epidemy, such as medicines, vaccines and medical equipment in general.
Due to a huge health crisis, which forced the closure of global supply chains, analysts expect China’s gross domestic product growth to fall as low as 3 percent in the first quarter, compared to 6 percent at the tail-end of last year. The virus is a huge problem for the Chinese economy which has already suffered a slight decline coming from a year-long trade war. “The coronavirus has dealt a big blow to the economy and that creates demand for stimulus,” said Ivan Chung, an analyst at Moody’s in Hong Kong. “Virus control bonds provide a solution.”
Since the start of February, more than Rmb24bn ($3.4bn) was raised by Chinese businesses by selling “Virus Bonds”. Most of the bonds have a maturity period of less than a year (information provided by Huarai Securities). The main idea behind this financial instrument is the help it should provide for the country to fight against the virus, therefore companies who issue this type of bonds must commit to spending at least 10 percent of their proceeds to combating the epidemic, which has caused numerous deaths and a further decline in the Chinese economy. A good example of what companies can do is selling or producing relevant items for helping the population to fight the epidemy, such as medicines, vaccines and medical equipment in general.
Due to a huge health crisis, which forced the closure of global supply chains, analysts expect China’s gross domestic product growth to fall as low as 3 percent in the first quarter, compared to 6 percent at the tail-end of last year. The virus is a huge problem for the Chinese economy which has already suffered a slight decline coming from a year-long trade war. “The coronavirus has dealt a big blow to the economy and that creates demand for stimulus,” said Ivan Chung, an analyst at Moody’s in Hong Kong. “Virus control bonds provide a solution.”
One of the first issuers, Wumei Technology Group was close to the original policy objectives. They issued a 43.1 million short-term note with a maturity of 231 days, promising to fully commit the proceeds to “replenish part of its cash holdings to ensure livelihood supplies to resist novel coronavirus epidemic,". Supply chain operator has also pledged to use commit its efforts to provide efficient flow of essential nutritional resources. Midsize airlines soon started to issue virus bonds. The total sum of the 1.8-billion-yuan worth of bonds, with the maturity period of 180 days, has been issued by Shenzhen Airlines, a subsidiary of Air China. A Fujian-based unit of China Southern Airlines, Xiamen Airlines, has also issued bonds amounting to 1.3 billion yuan in total. This was expected because airlines are known to be the ones whose sales were hit the hardest due to the virus outbreak.
However, less than half of the income from bond sales were used by these companies on epidemic related expenses, (ticket refunds, transporting essential items). Most of the money was used by the companies to cover their debts which were increasing due to the spread of the virus. Unfortunately, this practice was obtained by most of the companies who issued the virus bonds, and this financial instrument soon became a good way for the companies to shore up their balance sheets. Tim Fang, head of global markets at Hong Kong-headquartered investment bank AMTD Group, mentioned that money flowing in from these bonds may be used as a good way to take a defensive stance for companies who are anticipating the economy to decline further than it already did. Furthermore, the fact that companies are using the bond to cover their debt is a sign that Beijing has given up on stimulating the economy. It should also be mentioned that there is no guarantee that virus bonds will not default as a lot of investors are questioning the health of the companies who issued the bonds.
Looking at the current situation on Chinese markets and the behavior of bond issuer companies we can safely assume that there should be at least short term benefit from new financial instrument, however it is not expected to be exploited to its full potential due to self-centered pattern of use implemented by the companies.
Vladimer Choghoshvili
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(Cover Image by Gerd Altmann from Pixabay)
However, less than half of the income from bond sales were used by these companies on epidemic related expenses, (ticket refunds, transporting essential items). Most of the money was used by the companies to cover their debts which were increasing due to the spread of the virus. Unfortunately, this practice was obtained by most of the companies who issued the virus bonds, and this financial instrument soon became a good way for the companies to shore up their balance sheets. Tim Fang, head of global markets at Hong Kong-headquartered investment bank AMTD Group, mentioned that money flowing in from these bonds may be used as a good way to take a defensive stance for companies who are anticipating the economy to decline further than it already did. Furthermore, the fact that companies are using the bond to cover their debt is a sign that Beijing has given up on stimulating the economy. It should also be mentioned that there is no guarantee that virus bonds will not default as a lot of investors are questioning the health of the companies who issued the bonds.
Looking at the current situation on Chinese markets and the behavior of bond issuer companies we can safely assume that there should be at least short term benefit from new financial instrument, however it is not expected to be exploited to its full potential due to self-centered pattern of use implemented by the companies.
Vladimer Choghoshvili
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here: http://eepurl.com/gXkWpf
(Cover Image by Gerd Altmann from Pixabay)