Exclusive: Regulators Suspend New Debt Product on Risk Concerns, Source Says

China’s financial regulators have suspended the issuance of a new type of financing product known as standardized commercial paper (SCP) less than two years after it was introduced amid concern over the risks attached to the instruments, an industry participant told Caixin.

Banks suspended their SCP business after banking regulators issued “window guidance,” the source said. “Regulators notified banks by phone to tell them to stop, saying that some business risks were not being controlled well,” the source said. Although securities firms are still permitted to handle the products, none dare to do that in the current environment, the source added.

The debt instrument, which is traded in the interbank and commercial paper markets, was launched in July 2019. From July last year, when SCP regulations issued by the central bank took effect, to the end of December, 58 such products were sold, raising a total of 6.2 billion yuan ($942.7 million), analysts from brokerage Huachuang Securities Co. Ltd. wrote in a Wednesday report. But not a single issue has taken place this year, they said.

In China, SCP, also known as a standardized note, is similar to an asset-backed security, a bond or other financial security which is backed by income-generating assets such as auto loans, mortgages and credit card receivables. SCPs are backed by pools of commercial paper — funding instruments that facilitate commercial transactions — of similar maturity.

The task of creating the SCP product was given to Shanghai Commercial Paper Exchange Corp. Ltd., the operator of the national bill trading platform. There were several objectives including providing investment products for the asset management industry after an overhaul of the regulatory framework announced in 2018 limited their ability to invest in nonstandard assets, which are defined as debt assets that are not traded in the interbank and equity markets. The rules were also aimed at improving the financial markets’ ability to serve the financing needs of small and midsize enterprises, boosting the development of supply chain financing, and supporting the liquidity of small and midsize financial institutions, according to regulations (link in Chinese) issued by the People’s Bank of China (PBOC).

Further regulations governing the SCPs were announced by the State Council’s Financial Stability and Development Committee in May 2020 as one of 11 major financial-market reforms.

In China, commercial paper is classed as a nonstandard asset so creating a new standardized product backed by the instrument and that can be traded in the interbank market should help the commercial paper market grow, some market insiders have said.

The Huachuang analysts speculated that the issuance of SCPs was suspended due to tighter oversight and ongoing work to adjust regulations related to depository institutions. They said they expected issuance would resume after regulators further clarify what constitutes an SCP and what type of assets will be eligible to back the products.

Some experts have been warning about the risks of SCPs and the need to strengthen regulation. The legal attributes of the product need to be clarified as do the rights and obligations of stakeholders so that disputes and violations of regulations can be properly dealt with, Zhou Chengjun, director of the PBOC’s finance research institute, said in a speech in August last year that was republished (link in Chinese) by Caixin on Friday.

Several industry participants told Caixin they believe the suspension will only be temporary, because the financial authorities want to expand the use of SCPs as part of a broader policy to develop the commercial paper market.

One market participant who was involved in designing an SCP product told Caixin that the introduction of such products will help to transform the commercial paper market into a standard short-term bond market.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and Nerys Avery (nersyavery@caixin.com)

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