Aug 13, 2021 10:24 PM

Regulator Gets Tough on Bond Underwriters to Stop Price War

Competition has always been intense in the bond underwriting business, but has become even fiercer over the past few years. Photo: VCG
Competition has always been intense in the bond underwriting business, but has become even fiercer over the past few years. Photo: VCG

China’s interbank bond market regulator has intervened yet again to try to end a vicious price war among bond underwriters that’s seen fees drop to almost zero as they scramble to gain market share and win clients.

The National Association of Financial Market Institutional Investors (NAFMII), which oversees the interbank market, has issued rules requiring lead underwriters to report their fees on a quarterly and annual basis. It also ordered them to set up internal management systems to strengthen standards on their underwriting business and ensure that quotes for business are based on the cost of the project.

Lead underwriters will have to submit reports and be subjected to onsite inspections and other, unspecified measures, if their fee quotes are found to be significantly lower than a fair market rate, according to a notice (link in Chinese) released Wednesday by the industry self-regulatory body which is backed by the central bank.

“Lead underwriters must … not violate fair competition, conduct vicious low-price competition, or disrupt market order at any stage of a debt-financing project, from solicitation to underwriting and issuance,” the notice said. “If the lead underwriter or its staff violate the requirements for the underwriting and issuance of debt financing instruments and the provisions of this notice, NAFMII will take disciplinary measures that match the severity of the violation.”

The notice is the latest effort by financial regulators to curb unfair competition in the financial services sector. They have also imposed new requirements on credit ratings agencies to stamp out practices such as inflating rankings to bring in business.

Some bond underwriters have resorted to offering low fees to build up market share, with some even quoting prices that are below their costs, which has not only disrupted market order but also compromised the quality of the services they provide, NAFMII said in a statement (link in Chinese) accompanying the rules.

A group of five brokerages and a bank who won mandates to lead underwrite China Guangfa Bank Co. Ltd.’s proposed 60 billion yuan ($9.3 billion) bond issuance schedule for 2021 and 2022 were charging fees of 0.0001% to 0.0003% of the total to be raised, according to a statement on Monday announcing the selection.

In April, Xiamen Special Economic Zone Real Estate Development Group Co. Ltd. announced that the two winners of a mandate to underwrite a 100 million yuan bond — the Xiamen branch of Industrial Bank Co. Ltd. and Citic Securities Co. Ltd. — earned fees of just 10 yuan between them.

China Citic Bank Corp. Ltd. (601998.SH) topped the bond underwriting league in the interbank market in the first half of 2021, managing sales of 392.2 billion yuan, according to NAFMII data (link in Chinese). So far, the China subsidiaries of only two foreign banks, Germany’s Deutsche Bank AG and France-based BNP Paribas SA, have won approval (link in Chinese) to serve as lead underwriters for all onshore nonfinancial bonds in the interbank market.

The interbank market is China’s main bond market, accounting for 86% of outstanding onshore bonds (link in Chinese) at the end of last year.

Competition has always been intense in the bond underwriting business, but has become even fiercer over the past few years, industry participants told Caixin. The price war has lowered the quality of bond underwriting services and disrupted market order.

Some large firms are prepared to lose money underwriting because they want high rankings in market league tables and they hope to sell other, more profitable services, such as asset management, to the clients they win. But they are squeezing out the smaller financial institutions who are more dependent on underwriting fees, the sources told Caixin.

The new rules follow an effort by NAFMII in April to rein in competition when it told 90 financial institutions involved in bond underwriting to sign a “self-discipline” pact in which they pledged not to price their bond underwriting services below cost when bidding for an issuance. They also agreed not to promise clients they could secure specific coupon rates on the bonds they sold.

In December, NAFMII punished Bank of Ningbo Co. Ltd. (002142.SZ) for underwriting a number of bond issues with coupon rates well below reasonable valuations.

Contact reporter Guo Yingzhe ( and editor Nerys Avery (

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