The private sector is a significant part of the Chinese economy. It plays a critical role in keeping growth stable, creating jobs and boosting innovation. Yet the proportion of bonds issued by private firms in the overall bond financing market is relatively low, and has even declined in recent years. This has particularly been the case since 2018, when the proportion of bond financing by private businesses began a continuous decline, and their difficulties in direct financing have become acute.

Over the past few years, government authorities have scaled up their support for private sector bond issuances. This year's Government Work Report vowed to improve the system for supporting debt financing by private enterprises. Recently, the China Securities Regulatory Commission and the National Association of Financial Market Institutional Investors have also rolled out a series of competent measures and have improved the financing climate for private enterprises. However, as difficulties facing bond financing by private enterprises are shaped by a number of market-related factors and strongly impacted by market sentiment and structure, it still requires efforts on a number of fronts to fully address the issue.

As a critical financing channel for private businesses' bond issuances, China's bond market plays an indispensable role. Before 2016, credit risks hampered both small and medium-sized private enterprises, but these situations didn't dampen the improving trend of private businesses' bond financing. Between 2010 and 2016, the amount of bond issuances made by private businesses on an annual basis rose from less than 50 billion yuan ($7.51 billion) to 1.16 trillion yuan.

However, since 2018, the number of credit incidents and credit defaults by private enterprises has increased, and the financing difficulty of private enterprises has risen. In addition, since 2021, the frequent debt credit incidents by private real estate firms have blighted market confidence, resulting in a decrease in bond issuances by private firms in number, scale and proportion in 2021. At the same time, the amount of net financing by private enterprises has also turned negative.

The difficulty for private enterprises' bond issuances is created by various factors. Essentially, this issue is closely linked to market sentiment. On the one hand, risk-averse market sentiment and strict risk-control regulatory approaches by market agencies－who mainly lead bond financing by private firms－greatly hamper their confidence in private firms. This adds to difficulties in bond issuances. In addition, imperfect pricing and structural mechanisms within the bond market, insufficient application of innovative tools and incomplete risk mitigation modalities are the main issues restricting private enterprises' bond activity.

Insufficient market confidence has also made issuances less accessible to private firms in the bond market. Private firms are mostly of a relatively small scale. They have limited capacity to cope with risks and are greatly impacted by overall economic, policy and market environment issues, and are in a relatively weak position for bond financing in the market. The frequent occurrence of bond defaults in recent years has also weakened market confidence in purchasing bonds issued by private firms, while the delayed policy response to these defaults added to the cautious mood toward private enterprises.

To address the difficulty facing private firms' bond issuances, efforts need to be made on a number of fronts.

First, efforts should be made to boost and improve market confidence in bond financing by private businesses. On the one hand, private enterprises need to improve corporate governance and management, mind their debt levels, focus on long-term strategic planning, improve corporate efficiency, and enhance development resilience. They should also improve their bond performance and ban the malicious invasion of debt that harms investors. On the other hand, efforts should be made to boost investor confidence in private firms and guide the market to view debt risk among private enterprises in a rational manner. Multipronged efforts should be made to improve the overall financing environment facing private firms.

Second, bond financing tools by private firms should be more innovative, and channels for such financing need to be widened.

Third, the bond market structure needs to be improved with proper risk pricing mechanisms. Corresponding measures should be actively taken to improve both the structure of the bond market and the imperfect pricing mechanism. Market stakeholders from all sides need to work to optimize the pricing mechanism together with market-oriented reforms and improve the resource allocation function of the bond market. At the same time, the high-yield bond market should be further developed to make financing possible for private companies and low-rated companies able to issue bonds.

Fourth, efforts should be made to further optimize rational behavior among investors. It is important to cultivate multilevel investors with different risk preferences in a step-by-step manner, and attract more investors with high-risk preferences, strong risk-taking willingness and high capability to enter the market so as to boost the confidence of bond investors and increase investment demand with high-risk preferences. This will eventually drive up bond issuances by private firms from the demand side.

Fifth, efforts should be made to innovate the tools supporting private enterprises' bond financing activity and provide credit insurance functions for private enterprise financing.

The writer is vice-president of the China Macro-economy Forum (CMF) and chairman of China Chengxin International Credit Rating Co Ltd.