Jan 07, 2021 06:06 AM

China’s Corporate Bond Underwriting Fee Sets Record Low

A brokerage was willing to charge a 0.007% underwriting fee to handle a bond sale for a large state-owned enterprise.
A brokerage was willing to charge a 0.007% underwriting fee to handle a bond sale for a large state-owned enterprise.

Fierce competition to underwrite bond offerings by big state-owned enterprises is forcing brokerages to offer their services at next to nothing or even at a loss, a trend that prompted regulators to issue a series of rules to restrain vicious competition.

China National Nuclear Corp. Capital Holding Co. Ltd., a unit of state-owned China National Nuclear Corp., recently received underwriter bids for its sale of 4 billion yuan ($619 million) of bonds for an underwriting fee as low as 0.007%. At that rate, each underwriter would earn about 100,000 yuan on the deal, barely enough to cover costs.

Eventually the issuer didn’t pick the brokerages offering the lowest fee, but the average rate charged by the three winners was just 0.03%, meaning three brokerages would share a fee of 1.2 million yuan.

Brokerages are eager to handle large state-owned enterprises’ bond offerings for ultralow fees, hoping to build relationships with deep-pocket clients for future deals and generate revenue from related business. In the U.S., underwriting fees average about 0.7% on investment-grade corporate bonds, meaning that for a $1 billion issue, borrowers would pay underwriters about $7 million. Underwriting fees in China are generally lower, but a normal rate for large state-owned issuers should be at least 0.1%, according to an investment banker.

The aggressive price war attracted regulators’ attention. The Securities Association of China, a self-regulatory organization, started soliciting public comments Dec. 25 on a new set of rules governing corporate bond underwriting practices, requiring brokerages to establish an internal pricing constraint system.

In a 10 billion yuan bond sale by state-owned China Railway Construction Investment Corp., seven brokerages competed for four underwriter spots. Three of them offered an underwriting fee as low as 0.01%, and the highest rate was 0.03%, according to people familiar with the bidding.

China Railway announced winning brokerages Wednesday, and Guotai Junan Securities Co. Ltd., which offered a 0.03% underwriter fee, was not among them.

In July, after the winning bid for underwriting a 2 .1 billion yuan bond sale by another subsidiary of China National Nuclear was as low as 0.01%, the Securities Association of China initiated a self-discipline investigation (link in Chinese) of the eight brokerages that participated in the bidding.

The association warned of “self-disciplinary measures” if the brokerages — including Guotai Junan Securities, Haitong Securities, China International Capital Corp. and Citic Securities — are found to have violated rules in pitching for the underwriting business.

In April, a winning bid for underwriting Xiamen Special Economic Zone Real Estate Development Group Co. Ltd.’s 100 million yuan bond sale was 0.00001%, meaning the two underwriters shared a 10 yuan fee (link in Chinese) from the deal.

Later that month, the National Association of Financial Market Institutional Investors (NAFMII), a self-regulatory bond market regulator in China, called a meeting with 90 brokerages, which signed a self-disciplinary agreement banning brokerages from charging underwriting fees below cost.

The Securities Association of China has also got 27 brokerages to sign a similar self-disciplinary agreement in November 2019. But industry insiders said these self-disciplinary pacts are only gentlemen’s agreements, not mandatory regulation as they lack binding force and effective implementation.

Contact reporter Denise Jia ( and editor Bob Simison (

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