China Caps Private Corporate Bonds to Stem Credit Risks
(Bloomberg) — China’s securities regulators are taking steps to curb private bond issuance in a bid to contain credit risks at the nation’s weaker enterprises.
The China Securities Regulatory Commission (CSRC) and stock exchanges in Shanghai and Shenzhen issued window guidance to some brokerages to keep the outstanding value of privately sold corporate bonds on exchanges at or below 40% of issuers’ net assets, according to people familiar with the matter. New bond sales exceeding this ratio should be used only to repay old debt.
A Shanghai Stock Exchange official declined to comment, while the CSRC didn’t immediately reply to emails and a fax sent by Bloomberg seeking comment.
The move is set to limit a popular financing option for lower-rated businesses and local government financing vehicles as China seeks to stem rising defaults in the 3.55 trillion yuan ($500 billion) private placement market. Deals are struck with a small group of qualified institutional investors, shielding companies from market volatility.
“The requirement will affect new debt sales by lower-rated companies, and it is likely that some issuers’ existing private bonds have surpassed that level,” said Yang Hao, fixed income analyst at Nanjing Securities Co.
Regulators asked for the cap to be effective for new bond sales applications received after Sept. 19, said the people, who are not authorized to speak publicly and asked not to be identified. One person who was briefed by the CSRC said the move is aimed at preventing companies from incurring excessive debt.
So far this year, Chinese businesses have defaulted on 118 bonds, of which 47 were sold in private placements, Bloomberg-compiled data show.
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