China tightens collateral rules involving corporate bonds amid rising defaults
Mainland authorities have published rules barring the use of lower-rated corporate bonds as collateral in short-term borrowing in a bid to reduce financial risks.
The rules, which apply to the so-called repurchase agreement (repo) business in the exchange bond market, come amid rising corporate defaults and Beijing’s deleveraging campaign.
From Saturday, newly issued corporate bonds rated below AAA, or bonds sold by issuers graded lower than AA, cannot be used as collateral in repos, according to rules published late on Friday by state-owned China Securities Depository and Clearing Corp (CSDC). Bonds issued on or before April 7 will not be affected, according to the rules.
The rules are aimed at “strengthening risk controls in the collateral-backed repo business, and promoting stable and healthy development of the exchange bond market”, CSDC said.
Corporate bond defaults have surged on the mainland in recent years as the economy slows and the government steps up economic restructuring to eliminate “zombie” firms in struggling sectors such as steel and coal.
In 2017, more 5.5 trillion yuan (US$800 billion) of corporate debts are due, according to rating agency China Chengxin.