China Said to Loosen Rules on Issuance of Corporate Bonds

  • Issuers or bonds with AAA rating may be exempted from review
  • Regulator takes step towards approval-based issuance system

China is easing bond market rules as it tries to channel money to cash-strapped companies amid the slowest economic growth in a quarter century, people with knowledge of the matter said.

National Development and Reform Commission, one of the regulators for the nation’s corporate bonds, is taking the step as it moves toward a system to allow more firms to simply register to issue notes instead of getting individual approvals as they must now, the people said, asking not to be identified. Issuers or bonds with AAA credit ratings will be exempted from the regulator’s review process, they said.

President Xi Jinping is balancing vows to free up the nation’s financial markets with steps to prevent a rash of debt failures as corporate profits slide. Bond defaults have increased, with solar firm Baoding Tianwei Yingli New Energy Resources Co. missing payment on notes Tuesday in the fifth onshore default this year following China National Erzhong Group, according to China International Capital Corp. Sausage maker Nanjing Yurun Foods Co. said Monday it’s not sure if it can repay a note due next week.

“The new rules will make it easier for corporations to raise money and lower their funding costs, which is positive for the cash-strapped companies” said Liu Dongliang, a senior analyst at China Merchants Bank Co. in Shenzhen. “At the same time, relaxing the bond approval process means allowing more issuers into the bond capital market, including those with lower credit quality, which could be a potential risk.”

Some Exemptions

The NDRC didn’t immediately reply to a fax seeking comment.

Under the new rules, bonds with guarantee companies that have ratings of AA+ and above, and notes rated AA+ and higher with collateral, may also be exempted from the NDRC’s review process, the people said. All companies whose securities are regulated by the NDRC will be allowed to use note proceeds to finance projects from the start and will be permitted to use as much as 40 percent of proceeds for operations. Previously only higher-rated companies could use up to that amount for unspecified purposes.

The NDRC has distributed a document on the rules to all provincial development and reform commissions, the people said. The 21st Century Business Herald newspaper reported earlier that regulators issued documents to request improvements in corporate bond application, disclosure, use of proceeds and supervision.

The new rules come as China faces another debt scare. State-owned steel trader Sinosteel Co., whose parent warned of financial stress last year, may have to honor 2 billion yuan ($315 million) of principal next Tuesday when bondholders can exercise an option forcing the notes’ redemption two years before they mature. If that should happen, China Merchants Securities Co. thinks the firm will struggle to repay.

“These new rules are among a series of measures to boost the economy as gross domestic product growth is likely to slow further,” said Ji Weijie, an analyst at China Securities Co. “The Chinese government must have balanced the risk of allowing lower-quality companies into the bond market against the benefit of injecting funds into the real economy.”

For more, read this QuickTake: China’s Debt Bomb

— With assistance by Heng Xie, Lianting Tu, and Steven Yang

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