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On November 8th, the “second arrow” policy was announced to support private company bond issuance. The National Association of Financial Market Institutional Investors (NAFMII) vowed to develop and expand supportive bond financing tools to assist private companies, especially property companies. The PBOC will provide financial institutions with re-lending facilities to support private sector credit bond issuance. The financial tools for private enterprises to assist bond issuance, together with tools to increase private enterprises’ loan issuance and direct equity financing, are called “the three arrows” policy and were initiated in 2018.

“The second arrow” has strict application requirements, in other words, this supportive measure only works for high-quality private companies that have been negatively affected by market conditions. The new measure will go some way to mend credit confidence and market sentiment in a more efficient and timely manner.

The “second arrow” was the third round of policies in 2022 to support bond issuance from property companies. Back in May, at the behest of the central government, several commercial banks issued CDMWs (credit default mitigation warrants) to support appointed large private property companies to issue bonds. Whilst in August, a state-owned credit-enhancing company helped guarantee the bond issuance from several private property companies.

There are several differences between the “Second Arrow” and the previous credit-enhancing tools, which can better serve quality private property companies facing market-related difficulties. The differences include:

  • Scale.  The “second arrow” amount significantly exceeds the previous two rounds of credit-enhancing tools and can be extended beyond the initial 250 billion Yuan commitment, should there be an additional demand.
  • Lower cost for banks.  The PBOC will provide re-lending to the financial institutions that purchase the bonds issued by qualifying private companies. The banks can obtain low-cost funding from the central bank and the collateral once the bond defaults. The move may incentivise bond buyers and provide liquidity to those property companies in most need.
  • More targeted liquidity.  Under the “second arrow” policy, financial institutions directly purchase the bonds issued by private companies, injecting liquidity into the private companies more intuitively.
  • Lower cost for borrowers.  The cost for private companies to apply and use the “second arrow” is half the cost of previous credit-enhancing tools. Also, the amount of collateral required can be discounted for high-quality companies, not in default.

We are likely to see other supportive policies follow to enhance the impact of this effort, as evidenced by the publication of 16 detailed measures to help the property. Although it takes time for house buyers to recover their confidence, and house sales will hover at a low level in the near term, we believe these initiatives are a good start in the efforts to repair credit confidence and for the overall property sector recovery in China.

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    Sources

    Source: Eurizon SLJ Capital, Refinitiv Eikon & Bloomberg

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