SHANGHAI, Dec 20 (Reuters) - 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 authority borrowing.
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 list”.
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 risk.
Up to the end of November this year, corporates issued over 2 trillion yuan ($320 billion) in bonds, according to Reuters data.
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 disclosures showed.
$1 = 6.2303 Chinese yuan Reporting by Adam Jourdan; Editing by Eric Meijer