China Proposes Tighter Bond Market Leverage Rules After Defaults

  • An investor’s repo holdings can’t exceed 70% of bond holdings
  • ‘Deleveraging is the major focus’ for regulators: Hua Chuang

China has proposed measures to tighten leverage rules in the onshore bond market, highlighting concern that investors’ borrowings are overextended after a series of defaults.

The China Securities Depository and Clearing Corp. said a note investor’s outstanding repurchase contracts shouldn’t exceed 70 percent of debt holdings in the person’s account, according to one of two statements posted on the clearing house’s website on Friday. If an investor uses a security rated AA or AA+ as collateral, the amount shouldn’t be more than 10 percent of the bond’s total issuance, said the statement. The CSDC is seeking public opinions on the proposed regulations, it said.

Chinese regulators have sought to cut leverage in the bond market after at least 18 notes defaulted so far this year, already exceeding the tally for 2015. The outstanding amount of repurchase agreements in China’s interbank market, used by debt traders to amplify their buying power, declined 1.8 percent in August to 8.5 trillion yuan ($1.3 trillion) from July. Still, that’s 37 percent higher than the level a year earlier.

“Deleveraging is the major focus for bond regulators and will continue to be so in the medium term,” analyst Li Junjiang at Hua Chuang Securities Co. wrote in a report on Monday.

The other statement said authorities will give a 3- to 6-month transition period after the new rules are officially announced.