China’s Central Bank Releases Draft Rules for Defaulted Bond Trading

China’s central bank released draft rules on trading of defaulted matured bonds in the interbank market on Friday, following a record wave of corporate defaults last year.

The short document (link in Chinese), released by the People’s Bank of China (PBOC) on Friday, sketches out definitions, information disclosure requirements and risk-avoidance measures investors should take. The draft rules are open for comment until July 13.

Defaults on Chinese corporate bonds reached a record high last year and this wave has continued into this year as businesses struggle with cooling economic growth. Last year, defaults on corporate bonds soared nearly fourfold from 2017 to a record 120 billion yuan ($17.53 billion). This exceeded the combined amount for the previous four years by almost 10 billion yuan.

The PBOC began piloting the trading of defaulted bonds on the interbank market in the second half of 2018, and the pilot has been working smoothly and has laid the groundwork for a formal launch, according to a PBOC statement that accompanied the draft rules.

The China Foreign Exchange Trading System & National Interbank Funding Center under the PBOC and the Beijing Financial Assets Exchange started to host defaulted bond trading at the start of this year.

The trading of defaulted bonds on the two exchanges has been anonymous, with the information of the buyers and sellers concealed and the information of the default bonds revealed, a person close to the matter told Caixin in May. Therefore, even if the transaction fails, the holder of the defaulted bonds will not be revealed to other market participants, the person said.

Before the establishment of a trading mechanism for defaulted bonds, there were two main ways to deal with them — independent negotiations and judicial proceedings. Judicial proceedings usually take more than three years and the outcome is highly uncertain, while it’s difficult to evaluate the defaulted bonds in independent negotiations. “No one knows how to discount the bonds,” a bond market participant said in May. “A trading mechanism for defaulted bonds is beneficial for investors as they can get their money back more quickly. The mechanism also provides a marketized way for defaulted bonds to exit.”

Contact reporter Liu Jiefei (jiefeiliu@caixin.com)