* Bonds of loss-making companies to carry a designation
* Individuals need a minimum asset level to trade such bonds
* Rules unlikely to have major impact on wider bond markets
(Adds exchange's comments, background)
SHANGHAI, June 17 The Shanghai Stock Exchange on
Tuesday announced restrictions on who can trade high-risk bonds,
another step in a campaign to steer retail investors away from
risky high-yield investment strategies and toward buying and
holding for value.
The new regulations, effective immediately, say bonds
issued by companies that operated at a loss the previous year
will receive a special "ST" designation, identical to the
"special treatment" tag applied to shares in loss-making
companies trading on the stock exchange.
Individual investors must have at least 5 million yuan
($805,300) in financial assets to trade ST bonds, the statement
said. They must also sign a document saying they understand the
risk such trades entail.
"Recently the number of bonds listed on the Shanghai Stock
Exchange has hit repeated record highs, and credit risks of such
bonds have increasingly attracted attention from both the market
and regulators," an exchange representative said in a statement
published on its website (www.sse.com.cn).
China allowed its first default of a publicly-traded bond
this year when Chaori Solar defaulted on a bond traded on the
The announcement is unlikely to have a major direct impact
on China's wider debt market. China boasts a 30 trillion yuan
($4.83 trillion) onshore bond market, but the majority of those
bonds are traded in the interbank market by banks and big
institutional investors. By comparison, the Shanghai exchange
had only 1.72 trillion yuan worth of outstanding bonds at the
end of 2013, according to official data.
The exchange said that in addition to loss-making companies,
other firms including those which forecast losses for the
forthcoming year, companies with legal problems and companies
with operational issues that will affect their ability to repay
will also receive the designation.
MANY CREDIT-RATING AGENCIES
The exchange statement also said that company bonds rated
AA- or below will also get the ST tag, without elaborating on
which rating would be used. Chinese has four major credit
ratings agencies and numerous smaller ones. There have been
signs of a price war over clients, which analysts worry has made
some ratings unreliable.
Historically, Chinese retail investors have preferred
short-term strategies trading shares and bonds in highly
volatile smaller companies. Usage of the ST designator has not
persuaded the average Chinese stock investor to abandon such
shares for more stable large-cap companies.
In addition, wealth management products backed by
high-yielding bonds issued by lower-quality issuers have also
proven popular in China. Beijing has made efforts to dissuade
investors from believing such products are subject to an
implicit default guarantee.
As regulators have applied increasing pressure to high-risk
issuers, Chinese corporations have increasingly looked overseas
for fundraising in search of lower yields.
The Chinese corporate bond market is set to overtake the
U.S. to soak up one-third of global company debt needs over the
next five years, Standard & Poor's said on Monday.
"As much as 10 percent of global corporate debt is exposed
to the risk of a contraction in China's informal banking
sector," the agency said.
($1 = 6.2090 Chinese Yuan Renminbi)
(Reporting by Pete Sweeney and Lu Jianxin; Editing by Paul Tait
and Richard Borsuk)