Apr 30, 2020 09:43 PM

Dozens of Banks, Brokerages Pledge to Stop Underwriting Bonds on the Cheap as Defaults Rise

A total of 90 financial institutions in China have signed a pledge to stop offering to underwrite bonds for suspiciously low fees as regulators move to curb shoddy business practices that may have contributed to a recent rise in defaults, according to an industry association.

The National Association of Financial Market Institutional Investors (NAFMII), a central bank-backed body that oversees the interbank market, asked brokerages, banks and other bond underwriters in China to sign the “self-discipline” pact, a person familiar with the matter told Caixin.

Under the terms of the pact, the financial companies promise not to price their bond underwriting services below cost when bidding for an issuance, according to a Thursday statement (link in Chinese) released by NAFMII. They also pledge not to engage in any behavior that disrupts fair competition or creates chaos in the market.

By signing the pact, the underwriters also agree not to make promises to their clients about the coupon rate they could get for a bond issuance, or offer investors in the bonds any financial assistance, the statement said.

The financial institutions that signed the pact include some of the country’s biggest state-owned banks like Agricultural Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., as well as Shanghai-based brokerage Shenwan Hongyuan Group Co. Ltd., according to the statement.

Xu Zhong, a deputy secretary at NAFMII, said that competition in the world’s second-largest bond market has become so vicious that it has become a race to the bottom as underwriters vie with one another to offer the lowest prices to gain market share.

If this doesn’t change, the practice will end up damaging the interests of investors and undermine the development of China’s financial markets, he said.

NAFMII began asking financial institutions to sign the pact after a company in South China’s Hainan province announced Monday that it had selected the lead underwriters for a medium-term note it planned to issue. The winners, Citic Securities Co. Ltd. and Industrial Bank Co. Ltd., offered to underwrite the issuance for fees as low as 0.003% of the total amount raised.

That evening, NAFMII said it had opened an investigation (link in Chinese) into the underwriters and related parties.

According to financial data dealer Wind, China Securities Co. Ltd. and Citic Securities were the two biggest brokerages in China last year based on the total value of the bonds they underwrote.

In recent years, excessive price competition has lowered the quality of bond underwriting practices and contributed to a wave of bond defaults. Large firms are the main culprits, especially when it comes to bidding on high-quality, low-risk projects. They can afford to offer low fees for underwriting bonds, as they generally profit from offering their clients other services such as refinancing and asset management.

In April 2019, the local securities regulator in the southern province of Guangdong issued a public warning to major brokerage GF Securities Co. Ltd. for pricing its bond underwriting services below cost.

Contact reporter Tang Ziyi ( and editor Michael Bellart (

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