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New measures to lower bond default risks

Wang Yanfei
Updated: Jan 23,2018 7:51 AM     China Daily

The nation’s top economic regulator is strengthening assessments of possible corporate bond defaults at local levels to keep risks from threatening the financial system, with further efforts expected such as sending inspection teams and building a supervisory system.

The National Development and Reform Commission, responsible for approving the issuance of corporate bonds, is collecting reports on likely default risks from local authorities, NDRC spokesman Yan Pengcheng said on Jan 22.

Local governments must report possible default risks, submitting key information such as whether bond issuers and underwriters have made mandatory disclosures.

The government also is building a system to collect information directly from bond issuers, which should better regulate changes in using capital raised through bonds, according to people with knowledge of the matter.

“The system is expected to be a supplement, but it cannot prevent default fundamentally. Default risks need to be solved case by case,” the source said. “The regulator may send inspection teams this year to check if enterprises have proper plans to deal with possible defaults.”

Measures come after the commission warned of heightened risks amid repayment pressure this year.

Unlike bonds of other types, many corporate bonds approved are issued by large companies, often backed by local governments.

With relatively high ratings, corporate bonds have attracted investors amid a relatively loose financial environment in the past several years but have increased local governments’ off-balance-sheet debts.

Amid plans to tackle local government debt by forbidding local bailouts, tightened regulation might put sudden pressure on enterprises to repay their debts this year, according to analysts.

Last year, the Ministry of Finance issued guidelines preventing “implicit support” for guaranteed debt payments linked to governments so enterprises won’t be bailed out by local authorities.

Qin Han, chief fixed-income analyst at Guotai Junan Securities, said: “Credit risks are not accumulated in one day, and defaults are expected to occur this year amid tight regulation.

“The government might need to gradually expand more financing channels for enterprises to repay their debts.”