China’s central bank calls on struggling companies to restructure debt outside courts

Chinese regulators are urging struggling corporate bond issuers to seek voluntary debt restructuring in talks with their bondholders as a way to avoid default, as regulators last week issued new rules that seek to enforce investors’ protection amid rising defaults.

In building a more uniform, transparent approach for corporate bond issuers to handle a default, the People’s Bank of China has called for more debt restructuring, a practice that has long existed in other markets but is still relatively new in China.

The notice, jointly issued with the China Securities and Regulatory Commission and the National Development and Reform Commission, also includes the role that bond trustees should play in pursuing claims on behalf of bondholders. The statement followed its initial consultation launched last December.

“The encouragement of debt restructuring using market mechanisms may give companies more time to avoid outright defaults,” said Jenny Huang, Fitch Ratings’ director in China corporate research based in Shanghai.

The notice has come amid expectations that onshore corporate bond defaults will rise in the second half, as the total principal amount of onshore bonds issued by private enterprises domestically rated below AAA coming due will swell to 361.2 billion yuan (US$51.1 billion), more than doubling from 164.1 billion yuan in the first half, according to Fitch Ratings.