New Delhi: The Chinese government is allowing private companies to issue ‘anti-coronavirus bonds’ to fund its fight against the epidemic, on the condition that 10 per cent of funds raised are directed towards combating the virus.
With the rapid spread of the infection temporarily shutting down major production units and severely limiting mobility, China’s economy has taken a hit in the past three months.
Analysts expect China’s growth rate to fall below 3 per cent in the ongoing quarter from the nearly 6 per cent it was at towards the end of 2019.
To provide stimulus and incentivise companies, Beijing has cut the time approval of such bonds from weeks to just a few days. In return, each company will spend a minimum of 10 per cent of the total money raised on “measures to combat” the coronavirus epidemic.
For instance, the Fuyao Glass Industry Group is using 10 per cent of its proceeds to make glass for ambulance windshields, while the Wumei Technology Group plans to buy and supply cheaper vegetables, proteins, and meats to people.
According to Huatai Securities, since early February, at least 25 Chinese companies “ranging from airlines to drug distributors, have raised Rmb 24 billion (US $3.4bn)”. In the next few weeks, about 20 more businesses are expected to release bonds.
Most of these anti-epidemic bonds are being bought by the country’s state-owned enterprises and banks, who are also using it to cut their debts.
Virus in the economy
The bonds are one of the main instruments being deployed by policymakers.
According to Eswar S. Prasad, professor at Cornell University, China’s consumption has “been cut drastically”. The services and tourism sector, which have driven China’s recent employment growth, are the worst affected. This is in addition to the country’s manufacturing and financial centres experiencing a partial lockdown.
“The coronavirus has dealt a big blow to the economy and that creates demand for stimulus. Virus control bonds provide a solution,” Ivan Chung, an analyst at the global ratings agency Moody’s, told the Financial Times.
Moreover, the criteria which mandates companies to spend 10 per cent on fighting the epidemic, further relieves the government’s financial burden.
An official at the Bank of China, which has been one of the largest underwriters of these bonds, also told the Financial Times, “It is our duty to give out some profits to support the real economy. We are doing the greater good.”
The cheap bonds, though unconventional, have become an effective method to fund the efforts against the epidemic and kickstart the economy, but most companies issuing these bonds are also using them to pay back their existing debt.
“Just a week after the first issuance, it is becoming clear that companies are using the new funding instrument primarily to roll over old debts — another sign that deleveraging in China has taken a back seat to spurring growth,” noted a report in the Nikkei Asian Review.
The rate of interest that each company has to pay on the anti-epidemic bonds is substantially lesser than the interest they have to pay back on their existing loans, say analysts.
From Shenzhen Airlines, a subsidiary of Air China, to Wumei Technology Group, most have been using the new bonds to deleverage their debt.
“Among the 13 companies that released prospectuses on Wednesday and Thursday (13-14 February), over half of the maximum of total 8.85 billion yuan to be raised is going to be used for debt and loan repayment,” reported the Nikkei Asian Review.