Chinese bond issuers now dominate the sale of G3 bonds, with around 48.7% of the $189.5 billion sold in Asia ex-Japan this year coming from the country. But although Chinese issuance has become as regular as clockwork in the offshore market, the country’s bond market regulator is more similar to a stopped clock.
The National Development and Reform Commission (NDRC), a state planning body given the power to approve offshore bond plans, has earned a reputation as a big obstacle to offshore debt issuance. Officially, the regulator stepped back from approving deals several years ago, moving to a system where only registration is required. In practice, since the regulator often decides not to acknowledge that a deal has been registered, this is simply an approval process by a different name.
The regulator blows hot and cold. It left too many issuers languishing last year when it became increasingly unwilling to allow bonds to be registered. It has shown an altogether different attitude this year, handing out quotas at a breakneck pace. Issuers complain about a laborious approval process, with city, provincial and state departments all needing to agree a deal before it can hit the market.
The Reserve Bank of India (RBI), the country’s central bank, also has a reputation as being a difficult warden for those issuers hoping to raise debt in the overseas markets. The central bank is prone to tie Indian issuers up in red tape, relying on an exhaustive and sometimes restrictive set of regulations to determine the flow of deals offshore.
The RBI is stringent on filing standards, forcing issuers to file frequent updates about even small changes in their deal terms. It also tries to direct the market, attempting to replace the invisible hand of Adam Smith with the very visible hand of Urjit Patel, the governor. It sets minimum tenor limits, dictates how much of a bond can be held by non-Indian investors, and gives upper boundaries for pricing that ensure some riskier issuers can simply not access the market.
The two regulators share much in common. They are both big players in Asia’s offshore bond markets, casting a looming shadow over any discussions a bank has with their Indian or Chinese clients. They have a reputation for scuppering deals as much as encouraging them, for interfering with the natural function of the market, and for using bond flows as a backdoor means of controlling the currency.
But more interesting is where they differ. The NDRC and the RBI represent opposite poles of the spectrum in one crucial aspect — the clarity of their regulations.
Bankers may complain about the RBI’s exhaustive rules on ‘external commercial borrowings’, as the central bank calls offshore debt, but they at least know what those rules are. The central bank has published extensive details of its rules online, including a 49-page framework and a list of 60 frequently asked questions that was last updated on June 7.
The NDRC, by contrast, is an enigma. The regulatory body has occasionally published guidelines, such as when it moved from approval to registration system in late 2015. But they are vague, written in the cryptic legalese that Chinese officials are so fond of. This forces a certain amount of guesswork on the part of bankers, something made worse by the fact that some explicit rules — like the need to register offshore loans — appears to be only half-heartedly applied.
Chinese and Indian issuers continue to plough into the bond market, albeit in vastly different numbers. Chinese issuers have sold $92.3 billion of G3 bonds this year, compared to $3.88 billion from India. But this deal flow is happening despite, not because of, the regulators.
The two countries may take drastically different approaches to bond regulation but they give a clear example of a lesson that bankers have long been aware of: although there might only be a few ways to regulate well, there are plenty of ways to regulate badly.