Chinese authorities continue to make moves to mitigate the effects of a slowing economy including, in the latest, new corporate bond swap rules for exchanges.
The Shanghai and Shenzhen stock exchanges published new rules yesterday to formalize the practice of trading in maturing bonds for new bonds in an effort to improve the management of default risk.
The new rules were put in play under the guidance of the China Securities Regulatory Commission (CSRC) for the purpose of adding more risk management tools in the bond market and maintaining market order, according to a «Reuters» report citing the exchanges.
New Rules
China has had little experience with distress or default, the report added, not because of strong financial health but due to tactics historically used such as coupon slashing, payment extensions, private arrangements with bondholders or forcing investors into swaps.
But under the new rules, corporate issuers must make exchange offers to all bondholders that are equal, voluntary and not harmful to investor interest. Bond exchange plans must also be published ahead of offerings.
Downward Pressure
China’s 25 trillion yuan ($3.5 trillion) corporate bond market has been under increasing stress after already defaulting on a record 142 billion yuan last year, according to Moody’s. The nation is now facing serious challenges including the latest reported emergence of a new swine flu virus and severe flooding that has affected an estimated more than 50 million, in addition to ongoing U.S.-China tensions and the coronavirus pandemic.
Domestic Chinese investors are also signaling greater worries evidenced by the latest move to curb safe haven demand by limiting or banning customers from trading precious metals at major banks.
