Convertible Bonds: Will the Market Respond?

Recent regulations have been issued by the China Securities and Regulatory Commission to clarify the procedures that govern the issue of convertible bonds. Only a small number of companies in China have issued convertible bonds - will these new regulations do enough to boost this figure in the future?

On April 26 2001, the China Securities Regulatory Commission (CSRC) promulgated the Issue of Convertible Bonds by Listed Companies Implementing Procedures (Implementing Procedure), which took effect on the same day. At the same time, the CSRC promulgated three supplementary rules1.

In the four years since the promulgation of the Administration of Convertible Company Bonds Tentative Procedures (可转换公司债券管理暂行办法 ) in 1997, no other major legislation has been issued on the subject. A review of the history of the development of the convertible bonds market in China and an analysis of the provisions of the Implementing Procedures would be worthwhile in gaining an understanding of the impact of the new regulations on future developments of the market.

PERFORMANCE SO FAR

In China, the issue of convertible bonds dates back to the year 1991. By 1997, when the State Council promulgated the Administration of Convertible Company Bonds Tentative Procedures (Tentative Procedures), approximately 10 companies had issued convertible bonds to the public. However, Chinese companies have not recognized convertible bonds as a viable channel of financing. Only five companies have issued convertible bonds since the promulgation of the Tentative Procedures in 1997. This is a negligible figure, compared to the number of new stock offerings occurring over the same period. In May 2001, stocks of more than 1,100 companies were being listed on the Shanghai and Shenzhen stock exchanges, while only five convertible bonds were being traded on the market. Similarly, the market for corporate bonds in China is also not as popular, with the number of corporate bonds listed in May 2001 approximately 30.