China’s CSRC Expands Corporate Bond Sale Rules as Economy Slows

China will allow more companies to sell bonds as authorities seek to temper a slowdown in the world’s second-biggest economy while balancing corporate debt levels that already exceed the U.S.

The China Securities Regulatory Commission, which governs bonds traded on the Shenzhen and Shanghai exchanges, said it will allow all companies to sell notes, including non-listed Chinese companies, according to a statement posted on its website Jan. 16. The rules, which apply to exchanged-traded and privately issued bonds, took effect from that day, according to the statement. Previously, only Chinese brokerages and locally and overseas-listed Chinese companies had been able to raise funds selling exchange-traded securities.

The change demonstrates how authorities are looking for ways to expand companies’ financing channels and help them lower funding costs, Haitong Securities Co., the nation’s second-biggest brokerage, said in a report today. Chinese companies issued about 4.3 trillion yuan ($692 billion) of bonds in the interbank and exchange-traded markets last year, the most since Bloomberg started compiling the data in 2000.

“The new rules will help the expansion of the bond market, which will promote the development of direct financing,” Haitong Shanghai-based credit analyst Li Ning said.

Yields on top-rated five-year corporate bonds in China average 4.52 percent, down from 4.81 percent at the end of last year, ChinaBond data show. China’s economy may grow 7.3 percent this year, the official Xinhua News Agency reported on Jan. 17, quoting People’s Bank of China adviser Song Guoqing. That would be the slowest annual growth since 1990.

Interest Cover

The CSRC’s Jan. 16 statement said local government financing vehicles won’t be allowed to sell bonds on the exchange-traded market.

The CSRC also said companies wouldn’t be allowed to sell notes to public investors if they have defaulted on their debt in the past three years. Companies must also have had an average annual profit no less than 1.5 times their interest over the past three years, and a AAA rating, in order to sell notes to public investors.

The new rule means corporate bonds rated less than the top grade can’t be sold to individual investors with less than three million yuan in financial assets, according to Haitong Securities.

Default Watch

The debentures can be traded on stock exchanges, China’s National Equities Exchange or other equity exchanges that have State Council approval, the CSRC said. It earlier posted a draft of the rules for feedback, according to a Dec. 5 document.

China’s exchange-traded bonds account for less than 10 percent of the nation’s outstanding notes, exchange data show.

Last month, the China Securities Depository and Clearing Corp., the nation’s clearing agency for exchange-traded debt, said local notes rated lower than AAA aren’t to be used as collateral for short-term loans because they’re too risky. In China, credit scores of AA- or below are equivalent to non-investment grades globally.

China experienced the first corporate default in its onshore bond market in March last year when Shanghai Chaori Solar Energy Science & Technology Co. failed to make a full coupon payment. Shenzhen-based developer Kaisa Group Holdings Ltd. earlier this month missed a coupon payment on one of its dollar-denominated bonds. It has a 30-day grace period to rectify the situation or risks becoming the first Chinese real estate company to default on its U.S. currency securities.

— With assistance by Judy Chen

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