Caixin
Mar 22, 2017 05:21 PM
FINANCE

China to Tighten Rules for Using Corporate Bonds as Collateral

(Beijing) — China plans to stop allowing lower-rated corporate bonds to be used as collateral for repurchase agreements, as the government steps up efforts to guard against systemic risks in the financial market.

As of April 7, entities raising capital through the agreements — in which a borrower pledges to buy back a security in a short period of time for a higher amount — won’t be able to use newly issued corporate bonds rated below AAA or bonds sold to the public by issuers graded lower than AA as collateral.

Bonds issued before April 7 won’t be affected, under the plan proposed in a meeting Tuesday by the China Securities Depository and Clearing Corp. (CSDC), a state-owned clearing company.

People close to securities regulators told Caixin that the change is part of an effort by the central government to further reduce leverage in the financial market and reduce systemic risks. The government is concerned that more defaults may be ahead as industries such as steel makers and coal producers are told to trim excess capacity and then have difficulty generating sufficient profits.

Because the policy won’t affect outstanding bonds, it will have a limited effect on the general bond market in the short run, market analysts said. However, the change may make it harder for entities to issue bonds on the stock exchanges when the new policy goes into effect, increasing their financing costs as bond yields go up.

The volume of repurchase agreements on China’s stock exchanges has grown quickly in the past two years, swelling to 1.6 trillion yuan ($232 billion) from 900 billion yuan in 2015. Most of the entities using so-called repo agreements are securities brokerages and fund management firms, CSDC directors said during the meeting.

CSDC directors also raised concerns about a heightened risk of defaults as well as liquidity challenges as more bonds come due over the next two years at a time of economic challenges in China.

Data on the outstanding bonds on China’s stock markets signal how the plan might squeeze out some repo loans. Of the 9 trillion yuan in outstanding bonds trading on the Shanghai and Shenzhen stock exchanges, only 34.2% of the total funds were raised by issuing bonds that have the AAA rating, the highest, according to data compiled by Wind, a Chinese financial information provider.

Some securities firm managers feared the approach may turn out to be a one-size-fits-all policy, which focuses only on the rating but overlooks some special types of bonds, such as those only issued to some qualified investors as well as “green” bonds for environment-friendly projects.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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