Investor appetite for Chinese corporate bonds is expected to sweeten this year, as the country’s government implements stricter checks on the financial health of issuers.
The tougher scrutiny is much needed because the high default rates of Chinese corporate bonds this year and last have made investors think twice about buying these securities. The Chinese government has been seeking to attract more capital to the nation's cash-starved corporates, but must convince investors it is safe to put their money into corporate bonds.
“The stricter regulations will instil confidence in the market that investment in corporate bonds will be more sustainable,” Alexious Lee, head of China Capital Access Research at CLSA, told FinanceAsia.
With the stricter checks on corporate bonds, investors, whether domestic or offshore, will feel more secure investing in bonds without worrying about major hiccups, said Lee, whose role includes providing foreign firms with access to China's financial market.
In the last 12 months, the Chinese government has cracked down on grey financing channels such as shadow banking, but now it is allowing new regulated financing channels into the corporate bond market. In August last year, Chinese Premier Li Keqiang announced tax breaks for foreign investors in Chinese corporate bonds, for example. Currently, foreign investment accounts for only about 2.3% of China’s $12 trillion bond market, which is the world’s third largest.
Jini Lee, a Hong Kong-based partner at Ashurst, an international law firm, told FinanceAsia that the higher level of due diligence might also make it trickier for companies with a weaker credit rating to access the bond market.
The National Development and Reform Commission (NDRC) announced on February 12 that inspections would be conducted on corporate bonds and their issuers this year. The Chinese government body, which oversees bonds, will inspect the financial state of the issuers and examine whether the proceeds of corporate bonds are actually being used for the purposes stated in the bond prospectuses. The profitability of projects financed by the bonds will also be examined.
For corporate bonds found at risk of default, the NDRC will undertake measures to mitigate these risks, according to the announcement. For bonds which already defaulted, the NDRC will work with the issuers, underwriters and local governments to help creditors recover as much of their money as possible. The NDRC said it will conduct regular inspections of underwriters of the bonds.
Although the NDRC issued a similar announcement on inspecting bonds in November 2017, this year's announcement is different in that it explicitly requires local governments to adopt preventive measures and coordinate restructuring efforts in distressed companies, said Lee.
This suggests that the NDRC is taking a more proactive role in protecting the integrity of the bond market, Lee added. “The focus of this year's announcement is on managing systematic financial risks and [enhancing] the ability of quality Chinese corporates to raise funds in the bond market.”
Some 124 Chinese corporate bonds defaulted this year, totaling Rmb120.56 billion ($17.9 billion), which represented a record. Year-to-date, 17 Chinese corporate bonds totaling Rmb12.1 billion have defaulted.
The high default rate has heightened the Chinese government's concern for the reputation of the market. It wants to ensure companies issuing bonds are capable of repayment, said Dane Chamorro, a senior partner at Control Risks, an international risk consultancy.
"This won’t help current bondholders very much because they may be stuck with some poor performers, but it may give confidence to future buyers and that is what Beijing is most concerned about since there is little appetite for new private corporate bonds, given the recent defaults,” said Chamorro.
China Minsheng Investment Group (CMIG) missed repayment on a $442 million private placement bond on January 29, but repaid the overdue note on February 14, The investment giant, described by some as a “JP Morgan wannabe”, was founded in August 2014 by 59 private companies with registered capital of Rmb50 billion, according to its website.
“CMIG is just one prominent example and won’t be the last. While China wants more capital from abroad, investors will require greater transparency and more convincing legal protections,” said a report on February 15 by Enodo Economics, a London economic research house.
