China’s NDRC Said to Suspend Company Bond Assents Amid Probe

China’s top economic planning agency is said to have suspended approvals this week for the sale of corporate bonds, deepening a crackdown on corruption and irregularities in the market for the securities.

The National Development and Reform Commission, which oversees bond sales by unlisted companies, stopped accepting applications for new issuances this week, according to people familiar with the matter. It’s not clear when applications will resume, said the people, who asked not to be identified because the suspension hasn’t been made public. The 21st Century Business Herald also reported the halt yesterday.

At stake is a market that has helped finance more than $100 billion worth of corporate notes in the first 9 months, according to data compiled by Chinabond. China on Oct. 2 announced plans to ban local governments from additional borrowing through financing vehicles as authorities step up efforts to control risks to the financial system. Most bonds approved by the NDRC are from LGFVs, according to Song Qiuhong, an analyst at Foshan Shunde Rural Commercial Bank Co.

“The suspension, if it’s true, shows the government may want to strengthen regulation of LGFV bond sales,” said Song in Foshan, a city in the southern province of Guangdong. “They may want to prevent a sharp pickup in LGFV note sales before the new rules take effect.”

Document Checks

A brokerage employee who attempted to submit a bond sale application with the NDRC today said that an official told him the agency was only looking at documents today and not formally accepting the requests pending additional requirements for documentation. NDRC officials had previously given verbal acceptance of applications when they were delivered, according to the person, who asked not to be identified because he’s not authorized to speak with media.

The NDRC didn’t respond to a faxed request for comment yesterday. An official who answered the phone today asked for questions to be faxed, and there was no immediate reply to the queries.

The NDRC is allowing some corporate bond issuers to submit applications from today after brokerages argued against a halt on reviews, China Business News reported, citing an unidentified person at an underwriter. Only applications that include a document on risk prevention issued by the commission’s provincial branches are allowed to be submitted, the report cited a separate unidentified person as saying.

Mounting Liabilities

Listed companies in China can sell bonds to refinance debt in the separate, smaller exchange-traded market, which falls under the jurisdiction of the China Securities Regulatory Commission.

China’s towns and cities have used more than 10,000 financing vehicles to sell notes after they were barred from directly issuing bonds under a 1994 budget law. The nation’s legislature passed amendments to the budget law at the end of August that lay the legal framework for allowing local governments to raise funds by directly selling bonds.

Local-government debt swelled 67 percent from the end of 2010 to 17.9 trillion yuan ($2.9 trillion) as of June 30 last year, according to the National Audit Office. Almost 40 percent of local governments’ liabilities came from off-budget funding through their more than 7,000 financing vehicles, the auditor said in December.

Rules Tightened

LGFVs issued 1.7 trillion yuan of debt this year, exceeding the 1.16 trillion yuan of 2013, data compiled by Bloomberg show. Repayments will amount to 250 billion yuan a year in 2014-15, and may rise to 350 billion-400 billion yuan in 2016-17, according to Lianhe Credit Rating estimates.

“It’ll take some time for the NDRC to work out the details following the Oct. 2 State Council guideline on LGFV debt,” said Sun Binbin, a Shanghai-based bond analyst at China Merchants Securities Co. “It needs to design a framework to handle the existing notes and new issuance, and it may provide a grace period to provide a buffer.”

China has been tightening regulation of its interbank bond market since opening it to qualified foreign institutional investors in 2011. Sales are regulated by the People’s Bank of China and NDRC. It’s the biggest venue for notes in China, accounting more than 90 percent of securities outstanding.

Nonpayment Concerns

Credit concerns are escalating as property prices fall, state banks increase bad-loan provisions and at least 10 trusts have been struggling to meet payments since May. Five-year AAA corporate bond yields in China climbed to 5.15 percent on Oct. 13, the highest since Sept. 23. They touched 6.31 percent in January, the most on record.

Shanghai Chaori Solar Energy Science & Technology Co. marked China’s first onshore corporate bond default in March when it missed a coupon payment.

Policy makers have set a 7.5 percent growth target for 2014, which would be the slowest since 1990. Chinese firms have the most debt globally after increasing borrowings to $14.2 trillion as of Dec. 31, surpassing the U.S.’s $13.1 trillion, Standard & Poor’s said in a June report.

A former head of the NDRC’s fiscal and financial affairs department is being investigated in relation to corporate bond issuance dating back to 2005, Caixin magazine reported Aug. 13.

The Central Commission for Discipline Inspection of the Communist Party was investigating brokerages for possible bribery with a focus on bond underwriting, 21st Century Business Herald reported June 17.

— With assistance by Steven Yang, Feiwen Rong, and Judy Chen

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