China tightens rules on debt-investing asset management as defaults increase


Tue, Jul 19, 2016 - Page 10

China is tightening the leverage of structured asset management plans that invest in bonds, highlighting authorities’ concern about financial risks as the number of corporate defaults surge.

The China Securities Regulatory Commission said the size of the senior tranche of fixed-income products should not be more than three times that of the junior tranche, according to the statement, which did not specify the previous figure.

Senior portions of such products are usually bought by banks’ wealth management products, which help brokerages and asset management firm subsidiaries boost their buying in the bond market.

The cap before was 10 times, according to Industrial Securities Co (興業證券).

“The regulators have realized the possible risks the leverage can bring,” said Fan Lei (樊磊), an economist at Mizuho Securities Asia Ltd. “The new rules would help lower financial risks.”

Chinese regulators are seeking to cut bond investors’ leverage after 17 publicly traded bonds in the nation defaulted this year amid the weakest economic growth in a quarter century, versus seven last year.

Earlier this month, one of the bond clearing houses tightened rules on leverage in the corporate note market by lowering ratios that determine how much investors can borrow to buy new securities using holdings of exchange-traded company debentures as collateral.

The regulation, which was to take effect yesterday, applies to privately raised funds managed by brokerages, asset management firms or futures companies, the statement said.

The rules are to apply to new products sold after the regulation takes effect, according to a separate statement.

Bond investors have borrowed more funds to boost their returns as yields decline.

The outstanding amount of repurchase agreements in China’s interbank market, used by bond traders to amplify their buying power, last month jumped 21 percent to 9.4 trillion yuan (US$1.4 trillion) from May, the highest level this year.

For asset management plans that focus on equity investments, as well as ones that invest in both stocks and bonds, managers can borrow up to 100 percent of money invested in their funds, according to the statement, which did not specify what the previous ratio was.

Financial institutions selling the products should not guarantee minimum returns or no loss of principal, the statement said.