SHANGHAI – China’s top planning agency has ordered issuers of so-called enterprise bonds and their underwriters to assess the risks of default and report back to the government in a nationwide campaign to limit systemic financial risk.
The National Development and Reform Commission (NDRC) ordered issuers to take stock of their ability to repay principal and interest and submit reports by April 15 every year, starting this month, according to three sources with direct knowledge of the notice and a copy seen by Reuters.
Concerns have been rising over company debt after corporate bonds rallied to levels that analysts see as a possible sign of bubbly market conditions given the rising level of indebtedness and defaults.
In China’s fragmented bond issuance system, the NDRC is responsible for approval of “enterprise bonds” of one-year and above issued by non-listed, mostly state-owned companies. The China Securities Regulatory Commission and People Bank of China regulate other categories of corporate debt.
The NDRC did not have an immediate comment on Wednesday evening when contacted by telephone and fax.
Companies at risk of defaulting on their bonds must report the situation to the NDRC in a timely manner, the notice said. It urged bond underwriters to make inspections of issuers and submit reports to the agency.
The purpose of the inspections was “to protect the stability of the bond market, protect investor interests and prevent local or systemic risks against the backdrop of heavy downward pressure on China’s economy and rising default risks”, the NDRC said.
China’s bond market is much larger than its stock market and institutional exposure to bonds runs deeper. Many analysts believe a bond market crash would create a greater risk to economic stability than a crash in the stock market.
“We’re seeing an increasing number of defaults, and the government has realised the seriousness of the issue,” said Wang Qing, an analyst at Yuanta Securities. “The situation is still manageable, so the government wants to prevent it from becoming a systemic problem.”
Corporate debt surged to 14.4 trillion yuan (S$3.0 trillion) as of the end of 2015, central bank data showed. It was not clear what proportion was enterprise bonds.
As part of the self-inspections, issuers must check funding sources for bond repayments, how bond proceeds have been used, and whether agreements are honoured and disclosure properly made.
Those who fail to conduct the inspections and make proper disclosures would be punished, the NDRC said.
The bond market is a key market for China to develop as it moves to rationalize the allocation of capital and is critical to plans to internationalise the yuan currency.
The local bond market recently further opened to long-term foreign investors allowing greater access to yuan-denominated assets.
For years, China’s bond market has worked on the assumption that the government would not allow a default. Issuers were effectively guaranteed by the state. However, China began in 2014 to cautiously allow bond issuers to miss payments.
Late last month, state-owned Dongbei Special Steel Group Co Ltd, an unlisted steel manufacturer based in the northeast, missed a payment on an 800 million yuan short-term note.
Another firm, power equipment maker Baoding Tianwei Group Co Ltd, also defaulted at the end of March on a 1 billion yuan private placement note.
In the past month, ratings agencies Moody’s and S&P have downgraded the outlook on China’s sovereign credit rating on concerns the government’s reform agenda will proceed more slowly than expected.
