Two approaches to bond regulation, both problematic

Companies in both China and India have to find their way through regulatory labyrinths to gain approval to sell offshore bonds. But although both countries have overbearing, occasionally irrational, regulators, they differ in one key respect.

  • By Matthew Thomas, Morgan Davis
  • 14 Jun 2018
Email a colleague
Request a PDF

Chinese bond issuers now dominate the sale of G3 bonds, with around 48.7% of the $189.5 billion sold in Asia ex-Japan this year coming from the country. But although Chinese issuance has become as regular as clockwork in the offshore market, the country’s bond market regulator is more similar to a stopped clock.

The National Development and Reform Commission (NDRC), a state planning body given the power to approve offshore bond plans, has earned a reputation as a big obstacle to offshore debt issuance. Officially, the regulator stepped back from approving deals several years ago, moving to a system where only registration is required. In practice, since the regulator often decides not to acknowledge that a deal has been registered, this is simply an approval process by a different name.

The regulator blows hot and cold. It left too many issuers languishing last year when it became increasingly unwilling to allow bonds to be registered. It has shown an altogether different attitude this year, handing out quotas at a breakneck pace. Issuers complain about a laborious approval process, with city, provincial and state departments all needing to agree a deal before it can hit the market.

The Reserve Bank of India (RBI), the country’s central bank, also has a reputation as being a difficult warden for those issuers hoping to raise debt in the overseas markets. The central bank is prone to tie Indian issuers up in red tape, relying on an exhaustive and sometimes restrictive set of regulations to determine the flow of deals offshore. 

The RBI is stringent on filing standards, forcing issuers to file frequent updates about even small changes in their deal terms. It also tries to direct the market, attempting to replace the invisible hand of Adam Smith with the very visible hand of Urjit Patel, the governor. It sets minimum tenor limits, dictates how much of a bond can be held by non-Indian investors, and gives upper boundaries for pricing that ensure some riskier issuers can simply not access the market.

The two regulators share much in common. They are both big players in Asia’s offshore bond markets, casting a looming shadow over any discussions a bank has with their Indian or Chinese clients. They have a reputation for scuppering deals as much as encouraging them, for interfering with the natural function of the market, and for using bond flows as a backdoor means of controlling the currency.

But more interesting is where they differ. The NDRC and the RBI represent opposite poles of the spectrum in one crucial aspect — the clarity of their regulations.

Bankers may complain about the RBI’s exhaustive rules on ‘external commercial borrowings’, as the central bank calls offshore debt, but they at least know what those rules are. The central bank has published extensive details of its rules online, including a 49-page framework and a list of 60 frequently asked questions that was last updated on June 7.

The NDRC, by contrast, is an enigma. The regulatory body has occasionally published guidelines, such as when it moved from approval to registration system in late 2015. But they are vague, written in the cryptic legalese that Chinese officials are so fond of. This forces a certain amount of guesswork on the part of bankers, something made worse by the fact that some explicit rules — like the need to register offshore loans — appears to be only half-heartedly applied.

Chinese and Indian issuers continue to plough into the bond market, albeit in vastly different numbers. Chinese issuers have sold $92.3 billion of G3 bonds this year, compared to $3.88 billion from India. But this deal flow is happening despite, not because of, the regulators.

The two countries may take drastically different approaches to bond regulation but they give a clear example of a lesson that bankers have long been aware of: although there might only be a few ways to regulate well, there are plenty of ways to regulate badly. 

  • By Matthew Thomas, Morgan Davis
  • 14 Jun 2018

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 China Merchants Securities Co 14.44
2 Industrial and Commercial Bank of China (ICBC) 11.65
3 Bank of China (BOC) 10.33
4 CITIC Securities 8.41
5 Agricultural Bank of China (ABC) 7.17

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,075.14 2 13.84%
2 CITIC Securities 952.42 4 12.26%
3 Bank of China 754.84 3 9.72%
4 China International Capital Corp Ltd 721.75 3 9.29%
5 Guotai Junan Securities Co Ltd 668.93 3 8.61%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 2,199.70 15 11.58%
2 Citi 1,502.15 13 7.91%
3 JPMorgan 1,192.62 8 6.28%
4 UBS 1,022.45 9 5.38%
5 Standard Chartered Bank 1,009.43 7 5.31%

Asian polls & awards

  • GlobalCapital Asia capital markets awards 2018: Investment banks

    In the fourth and final instalment of GlobalCapital Asia’s capital markets awards announcements, find out the Best Asian Investment Bank and the Best Investment Bank in the region for 2018.

  • GlobalCapital Asia capital markets awards 2018: Bonds

    In part three of our results announcements, we reveal the winning bond deals across a variety of categories. In addition, we also name the Best G3 Bond House, Best Local Currency Bond House, Best High Yield Bond House and the debut winner of the Best House for SRI Financing.

  • GlobalCapital Asia capital markets awards 2018: Equities

    In part two of our results announcements, we reveal the winning equity deals and banks, including the Best Follow-on/Accelerated Bookbuild, Best Equity-Linked Deal, Best IPO, Best ECM Deal and Best ECM House.

  • GlobalCapital Asia capital markets awards 2018: Loans

    GlobalCapital Asia has spent the last two months talking to banks and their clients in a bid to determine the most impressive capital markets transactions and advisers across Asia ex-Japan in 2018. We are pleased to begin our awards announcements in the loan market.

  • GlobalRMB awards: Most impressive issuers, best law firm

    In this third part of the GlobalRMB awards, we present our reasons for choosing the best issuers in the FIG, corporate and SSA categories — and praise the strong performance of one well-known foreign law firm.