Reg­u­la­tors are aim­ing for im­proved bond in­vestor pro­tec­tion in case of any de­faults

China Daily (Canada) - - BUSINESS - By CHEN­JIA chen­jia1@chi­

Reg­u­la­tors will im­prove le­gal pro­tec­tions for bond in­vestors and strive to re­duce sys­temic de­fault risks, a se­nior of­fi­cial with the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion said on Thurs­day. “We will urge bond is­suers and un­der­writ­ers to shoul­der their obli­ga­tions and re­spon­si­bil­i­ties in case of a de­fault, and we will also study an im­proved com­pen­sa­tion sys­tem for in­vestors,” said Ouyang Ze­hua, di­rec­tor of the listed com­pany su­per­vi­sion depart­ment of the CSRC.

He’s also a deputy to the 12th Na­tional People’s Congress, the top leg­is­la­ture, which is cur­rently meet­ing in Bei­jing.

He was com­ment­ing on what is ex­pected to be the na­tion’s first on­shore cor­po­rate bond de­fault, which in­volves Shang­hai Chaori So­lar En­ergy Sci­ence & Tech­nol­ogy Co.

The com­pany said on Mon­day that it won’t be able to make an in­ter­est pay­ment of about 89.8 mil­lion yuan ($14.8 mil­lion) due on Fri­day on1 bil­lion yuan in five-year bonds that were is­sued two years ago.

As the com­pany’s bonds have a large re­tail in­vestor base, it makes the case note­wor­thy.

In­for­ma­tion about the de­fault will be re­leased ac­cord­ing to de­vel­op­ments in the case, and the CSRC has re­minded in­vestors to keep up to date with the sit­u­a­tion.

“We will keep an eye on po­ten­tial re­gional or even sys­temic fi­nan­cial risks,” said Ouyang.

In Pre­mier Li Ke­qiang’s an­nual govern­ment re­port re­leased on Wed­nes­day, he stressed the prin­ci­ple that any sud­den sys­temic cri­sis in the fi­nan­cial sys­tem should be pre­vented.

The CSRC of­fi­cial said Chaori So­lar was a case in which mar­ket rules were be­ing ob­served.

“The whole


en­ergy in­dus­try has been de­te­ri­o­rat­ing since mar­ket liq­uid­ity tight­ened in the sec­ond half of 2013, and that will af­fect com­pa­nies’ cash flows” this year, the reg­u­la­tor said.

Fitch Rat­ings saidonThurs­day said that “the likely first de­fault of a Chi­nese cor­po­rate on­shore bond will be pos­i­tive for the mar­ket in the long term as it will in­still greater dis­ci­pline to price credit risk more ef­fec­tively”.

Pre­vi­ously, many de­faults in China were averted af­ter lo­cal gov­ern­ments, State banks or as­set man­age­ment firms pro­vided emer­gency funds or debt ex­ten­sions.

Fitch an­a­lyst Wang Ying said that the Chaori de­fault may sig­nal a shift in the govern­ment’s stance to­ward a greater tol­er­ance of out­right cor­po­rate de­faults.

“We ex­pect a re­duc­tion of on­shore lenders’ and in­vestors’ risk ap­petites, which could pres­sure frailer com­pa­nies’ liq­uid­ity, es­pe­cially in sec­tors chal­lenged by cycli­cal down­turns and per­sis­tent ca­pac­ity sur­pluses,” Wang said.

“It may also prompt fur­ther reg­u­la­tory progress to pro­vide more clar­ity on the le­gal process gov­ern­ing do­mes­tic bank­rupt­cies and re­struc­tur­ing, which should ben­e­fit both on­shore and off­shore cred­i­tors in the long run,” she added.

Chang Jian, chief econ­o­mist in China at Bar­clays Cap­i­tal, said that high debt re­pay­ment pres­sures in a slow­ing econ­omy, along with in­creas­ing ma­tu­rity mis­matches in the of­fi­cial and shadow bank­ing sec­tors, sug­gest greater liq­uid­ity risks.

“The govern­ment’s chal­lenges of deep­en­ing re­form, cre­at­ing a more mar­ket-ori­ented econ­omy and en­sur­ing sta­ble growth are huge,” she said.

Chang said sen­ti­ment in the high-yield bond mar­ket could be hurt by a de­fault, but “risk-free” as­sets would likely be sup­ported, given the cur­rently eas­ier liq­uid­ity con­di­tions.

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