China securities regulator restricts bond fund investments in NCDs: sources

SHANGHAI (Reuters) - China has imposed new limits on investments by some mutual funds into negotiable certificates of deposit (NCDs), people with knowledge of the matter said, as part of a widening campaign to reduce risks in the country’s financial system.

The debt instrument, which has been used to fuel speculative investments by smaller banks, is drawing increasing scrutiny from regulators as issuance of the product hits a record high.

The China Securities Regulatory Commission (CSRC) advised mutual fund companies through so-called “window guidance” that a bond fund’s total investment allocation to NCDs cannot exceed 20 percent of its portfolio during its establishment period.

The same guidance also said newly established bond funds could comprise less than 80 percent bonds.

A message seen by Reuters and confirmed by two sources said the window guidance was issued in response to concern about excessive allocation of NCDs by mutual fund companies in their bond funds.

The message was directed at mutual fund companies in Shanghai. It was unclear whether companies based outside of Shanghai are also covered by the restrictions.

The limits were previously reported by China Securities Journal, citing unidentified sources.

Jonas Short, an analyst with Everbright Sun Hung Kai, said that the window guidance was consistent with previous targeted policies aimed at controlling risks in the financial system.

“(It’s) more to do with restricting fund management companies from concentrating risk, as opposed to attacking NCDs,” he said.

Window guidance refers to informal instructions from regulators that are often communicated orally with no written notice.

The CSRC did not immediately respond to a Reuters request for comment.

The direct market impact of the move is likely to be limited, as new bond funds are established relatively infrequently.

The most recent data from the Asset Management Association of China showed that there were 989 bond funds with a net asset value of 1.46 trillion yuan ($232.50 billion) at the end of December, compared with 982 funds with a net asset value of 1.31 trillion yuan at the end of September.


The CSRC’s directive comes amid surging issuance of NCDs by China’s banks, confounding expectations that a string of rules targeting the instruments would dull their appeal and force some banks to change their business models. [nL8N1PJ12W]

A Reuters analysis of official data from the China Foreign Exchange Trade System showed that banks had issued 2.06 trillion yuan ($328.40 billion) of NCDs this month through March 26.

As of March 26, the value of outstanding NCDs had reached 9.51 trillion yuan, the highest ever. However, year-on-year growth in the value of outstanding NCDs has continued to slow in the first quarter.

(Graphic: Outstanding China NCDs hit record -

(Graphic: Outstanding China NCDs at record, but growth slows -

Despite the increase in issuance, official data suggest that policies restricting smaller banks may be having the desired affect.

“It’s pretty much the larger banks that are issuing ... (NCD issuance) can still expand as long as you’re within the one-third (liability) requirement,” said Logan Wright, director of China markets research at Rhodium Group.

In January, window guidance from the central bank indicated that banks’ applications for quotas to issue NCDs would be rejected if the issuance plus the bank’s existing interbank borrowings exceeded one-third of its total liabilities.

($1 = 6.2795 Chinese yuan)

Reporting by Andrew Galbraith and Engen Tham; Editing by Sam Holmes and Kim Coghill