SHANGHAI Dec 20 China's National Development
and Reform Commission (NDRC) said on Thursday it was toughening
up its rules on bond issuance, including banning over-indebted
firms from selling new bonds.
The NDRC, China's top economic planning body, said in a
circular published on Thursday that it would also require local
governments to strengthen their bond risk controls, a move that
could reflect the commission's intent to curb excessive local
The NDRC can use debt-to-asset ratios to judge a company's
suitability to issue bonds, and firms with a ratio over 90
percent could be prevented from selling more debt.
The new requirements would also mean that companies with
debt ratios between 80 percent and 90 percent would have to
provide guarantees in order to issue bonds, while firms with a
ratio between 65 percent and 80 percent would be put on a "watch
Some industries, including highways, real estate, railways
and energy, would be granted slightly more leeway because of
traditionally high costs and debt levels in these sectors.
Bond issuance has become an increasingly popular channel for
corporate funding, offering a viable alternative to the
traditional bank finance route.
China has never had a bond formally default and while there
have been coupon misses, breaches of credit covenants and
failures to repay loans, those have been rare.
In most cases a local government or connected institution
has stepped in to make sure principal and interest is paid,
which analysts say has distorted the way the bond market prices
Up to the end of November this year, corporates issued over
2 trillion yuan ($320 billion) in bonds, according to Reuters
However, reports of trouble in China's wealth management
product industry - which invests heavily in bonds - and concerns
that some local government financing vehicles (LGFVs) have
already taken on more debt than they can feasibly repay in the
near term has caused regulators to tighten up.
Chinese banks have also been getting their accounts in line
with capital adequacy ratios specified by the Basel III accord.
In late November Chinese banks rushed to sell up to 150
billion yuan ($24 billion) of subordinated debt before the end
of the year before tougher issuance rules come into effect, bank
($1 = 6.2303 Chinese yuan)
(Reporting by Adam Jourdan; Editing by Eric Meijer)