The changes are stark and generally sensible. Perhaps most importantly, corporate issuers no longer need to wait for approvals from regulators; instead they simply need to register their issuance plans. This registration-based bond issuance system is enshrined in the amended Securities Law, which has been effective since March 1.
On the same day, the National Development and Reform Commission (NDRC) and China Securities Regulatory Commission (CSRC) — two separate, and sometimes competing, bond regulators — also announced a slew of complementary changes to make selling bonds easier for corporations.
For example, the minimum net assets requirements of Rmb30m ($4.3m) for joint-stock limited companies and Rmb60m for limited companies were scrapped. A requirement that an issuer’s total bonds outstanding cannot exceed 40% of its net assets was also eliminated.
However, while blanket regulatory changes like these aim to unify the standards of China’s three bond markets — each overseen by a different regulator — they may end up bringing more confusion to issuers and investors. China still has an alphabet soup of regulators doing a job that could more sensibly be done by one capital markets agency.
Chinese corporations can now sell three types of bonds: ‘company bonds’, which are sold in the exchange market and regulated by the CSRC; ‘enterprise bonds’, sold in the interbank market and regulated by the NDRC; and the elaborately-titled ‘debt financing instruments of non-financial enterprises’, which are also sold in the interbank market but this time are overseen by the National Association of Financial Market Institutional Investors (Nafmii).
What is the difference between these three types of bonds? Not much. The main difference is simply which regulators control those markets, hardly a sensible way of differentiating between bonds in one of the world’s biggest debt markets.
These three regulators have been competing with one another for a long time to attract more issuers, who have made the most of their attention from this trio of eager suitors. For instance, issuers applying to one regulator often decided not to disclose bonds they had sold under other regulators, a cheeky way of getting around the previous 40% net asset cap that was informally tolerated.
Bankers now have the battle scars to understand the strengths and weaknesses of the different regulators. The NDRC is slow, bogged down by the need for provincial departments to approve deals before the national regulator has its say. It is also demanding, asking that the use of proceeds be specified and pre-approved before each issuance.
Bankers say it is normal for issuers to wait a year, or even two, for the green light to issue bonds. As a result, local government financing vehicles and large state-owned enterprises — those with the connections to speed things along — dominate the enterprise bond market.
But the NDRC’s barriers to entry can benefit investors — enterprise bonds rarely default. Among the 178 defaulted bonds onshore in 2019, only four were enterprise bonds, Wind data shows.
Bankers also point to a well-known event to illustrate the low-risk nature of these bonds.
In October 2018, Sichuan Coal Group, a company directly owned by the Sichuan provincial government, managed to pay back the principal of a Rmb500m 5.2% eight year enterprise bond a week past due date. The same issuer has defaulted on six Nafmii-regulated bonds, according to data from Wind.
The CSRC, regulator of the company bond market, is known to be much speedier with approvals. The regulator delegates much of the reviewing and enquiring work to the Shanghai and Shenzhen Stock Exchanges, where these bonds are listed. The CSRC only gives a symbolic nod at the end.
That is a win for issuers but, unsurprisingly, the looser regulatory environment has led to more defaults. Out of the 178 onshore defaults in 2019, 135 were company bonds. There is an added disadvantage of the exchange market — commercial banks, which have the deepest pockets in China, have been allowed into the exchange market only very recently.
Nafmii, which regulates ‘debt financing instruments of non-financial enterprises’, has attracted issuers thanks to a transparent registration process and an eager bank investor base.
But Nafmii is, at least officially, a self-regulatory organisation. The state is so powerful in China that market bodies often become unofficial arms of government — and Nafmii is widely treated as a regulator — but it has little power to enforce legal procedures. Investors are often left on their own to reach some agreements with the issuer or go to court.
The different timeframes for getting issuance approvals, the different tactics of the three regulators and the different levels of tolerance each regulator has towards the market it governs mean that China’s regulatory system is now a libertarian’s dream. Even in regulation, the country has embraced the benefits of competition.
China’s determination to set up a registration-based framework that will bring the three regulators closer together — without unifying them — is certainly admirable. But it also raises questions about whether the country’s system of overlapping regulators is really fit for purpose.