China Mulls Bond Underwriter Cleanup

(Beijing) – China is mulling sidelining low-quality corporate bond underwriters, in a bid to improve the health of the growing onshore debt market.

The country’s bond market is the world’s third largest, with 70 trillion yuan ($10.36 trillion) of outstanding issuance as of Wednesday, according to financial information provider Wind. As offshore investors are now allowed direct access to China’s onshore bond market from Hong Kong under the Bond Connect program, there are even more calls for better regulation and health of the debt market.

Currently, the China Securities Regulatory Commission (CSRC) conducts an annual review to rank brokerages by their overall competitiveness, profitability, risk-management capability, regulatory compliance and the credit quality of bonds they underwrite.

These market players are categorized into five tiers, from A to E, with A being the strongest players. Each tier is also divided into three sub-groups, such as AAA, AA and A, with AAA the best of the best brokerages.

Recently, the Securities Association of China (SAC) – a self-regulatory organization for the securities industry supervised by the CSRC – proposed a new plan to ban players from being lead underwriters if they are not ranked at A or above in at least one of the past two years. For underwriters ranked at BBB or below, they must be one of the top 20 underwriters industrywide in terms of deal volume in order to be lead underwriters, the SAC said.

There were 44 such underwriters as of the end of 2016, with a combined deal volume at 2.21 trillion yuan, according to Wind.

Lead underwriters in general earn much higher fees than other syndicate members. The lead primarily directs the process of bond issuance, assesses the financials of bond issuers and is in charge of negotiating fees.

Market participants have been actively submitting feedback. It is unclear when the plan will become effective and whether the final plan will be the same.

“The entire bond-underwriting business will be under huge impact if the plan becomes effective,” said an investment banker from a major securities firm in China. “The possibility of vicious competition may be ruled out in the future.”

Some brokerages added that smaller players will likely be squeezed out as many of them don’t have the caliber or the economies of scale to challenge bigger players as lead underwriters.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)