Analysts urge broader range of channels for sales of domestic corporate debt

Chinese companies' financing costs are rising. Some financial experts said they should sell corporate bonds directly to residents and companies rather than to financial institutions.

"To support the real economy, China should restructure its financial system," Wang Guogang, director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said. "Only by allowing residents and companies to hold corporate bonds can lenders effectively manage corporate capital and make plans for companies' assets and increase property income at the same time."

Wang spoke at a monthly economic forum held by the China Center for International Economic Exchanges on Wednesday.

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Statistics from the People's Bank of China, the country's central bank, showed that by end-March, household deposits reached 49.4 trillion yuan ($7.9 trillion), up 11.4 percent from the previous year. The deposits of nonfinancial enterprises were 36.2 trillion yuan, a 5.6 percent year-on-year rise.

Such huge deposits should be used more efficiently to provide financial support to the real economy, experts said.

The interest rate of corporate bonds is higher than the deposit rate and lower than the lending rate. If companies are directly connected to capital providers, they will face lower financing costs and the lenders will receive higher returns on investment.

Most corporate bonds in China were purchased by financial institutions, cutting off the direct connection between companies and residents and increasing borrowing costs.

China's M2, a broad measure of money supply, totaled nearly 117 trillion yuan at the end of April, up 13.2 percent from a year earlier, but many domestic companies remained under intense funding pressure.

Among the M2 money supply, the central bank issued only 5 trillion yuan of currency into circulation while the banks created 112 trillion yuan of money through the deposit and lending system, Wang said.

"I'm afraid that China has reached the limit for strengthening the role of the banks in money creation and allocation of resources," he said. "If bank regulators ease their controls on the scale of new loans and off-balance-sheet activities, they are actually piling up problems for tomorrow."

Banks face significant financial risks because bad loans have grown during an economic downturn. In the end, the rising financing costs for Chinese companies will have a negative impact on the banks.

"The government should allow enterprises as well as urban and rural residents to take a step further into the financial market and play an active role in resource allocation," he said. "The players of our financial market are basically financial institutions. We must make changes."