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The week in review: PBoC cuts RRR, China deepens loan benchmark reform, regulators roll out bond default disposal rules

China Shanghai photo from Adobe 17Dec19 230x150
By Addison Gong, Rebecca Feng
06 Jan 2020

In this round-up, China’s central bank cut the required reserve ratio by 50bp on Monday, domestic financial institutions have been told to price loans based on the new benchmark and regulators have published draft rules on dealing with corporate bond defaults.

The People’s Bank of China (PBoC) cut the broad-based required reserve ratio (RRR) for financial institutions by 50bp on Monday, according to an official announcement on January 1. Analysts predicted the cut to release around Rmb800bn ($155bn) to Rmb900bn of liquidity.

The PBoC added in a separate statement that the RRR cut will pump in more than Rmb120bn of liquidity to city-level commercial banks, rural commercial banks, credit unions and village-level banks. It will also reduce banks’ funding costs by Rmb15bn each year. However, the measure should not be read as flooding the economy, PBoC said in the statement.

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Chinese financial institutions are no longer allowed to price new loans based on the old one-year benchmark lending rate, according to a December 28 announcement by the central bank. Instead, they must price their floating rate loans based on the Loan Prime Rate (LPR) introduced in August last year. The change will not affect the borrowing costs on outstanding mortgage loans.

Any unreleased contracts signed before January 1 must be renegotiated. Existing loans priced using the old one-year lending rate will be repriced based on LPR rates or switched into fixed rate loans. The repricings should be done between March 1 and August 31 this year.

“This brings forward an earlier timeline for financial institutions to price at least 50% of new loans issued using the LPR by December 2019 and at least 80% of new loans by March 2020,” Ho Woei Chen, an economist at UOB, wrote in a research note.

The central bank added in a separate statement that about 90% of the new loans are already priced based on the LPR benchmark.

“As medium-term lending facilities (MLF) rates will soon effectively become the anchor for pricing outstanding floating-rate loans, the PBoC could have stronger incentive to lower MLF rates and other quasi policy rates to deliver on its promise to lower financing costs,”  Ting Lu, chief China economist at Nomura, wrote in a research note.

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In response to the rising defaults in China, the PBoC, together with the National Development and Reform Commission and China Securities Regulatory Commission, published draft rules on corporate bond default disposal on December 27. The regulators are collecting public feedback until January 11, 2020.

The 26-point rules put bond trustees and bondholder meetings as core to dealing with defaults, while requiring issuers and related parties to strictly follow the information disclosure requirements. The PBoC also calls for better investor protection and education, and said all bondholders must be treated equally and fairly. Issuers and bond underwriters are required to specify default-related clauses in the official bond documents.

Among other things, the central bank also encouraged the trading and better valuation of defaulted bonds, and said bond exchanges and extensions of payments will be two of the debt restructuring methods.

Separately, the PBoC has published guidelines saying bonds that defaulted at maturity — or are in cross-default — can be traded in the interbank market, effective on February 1.

The transactions will use the settlement method of DvP, or delivery versus payment. Before the new rules, the central bank regulations required trading to be suspended one business day before the bond’s maturity date.

The draft rules were made public by the PBoC in June 2019. At the time, the central bank said it had been working on a pilot scheme in the interbank market for defaulted bond trading since the second half of 2018. The PBoC’s China Foreign Exchange Trading System and Beijing Financial Assets Exchange had taken part in the scheme.

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The National Association of Financial Market Institutional Investors (Nafmii) has also set the guidelines for defaults on debt financing instruments of non-financial corporates in China’s interbank market.

Among other things, Nafmii outlined steps for issuers to take after their bonds default, especially if their bond documents did not specify measures in case of distress. These include the requirement for the defaulted issuer to publish the agreement — such as date and price of planned payments as well as the interest rate — reached with all bondholders within two business days from the signing of the agreements.

In addition, the guidelines allow issuers to exchange their defaulted bonds. Nafmii said it will come up with the rules for such exchanges.

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Chinese securities houses and their subsidiaries were heavily involved in bond defaults in 2019, according to data compiled by Wind. Of the 223 defaulted bonds in the domestic market last year, 184 of them had at least one securities house as a lead underwriter. A total of 47 securities houses and their subsidiaries were involved in the defaults, said Wind.

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Data from the Ministry of Finance (MoF) showed that Chinese local governments raised Rmb4.36tr from bond issuance in 2019. These included Rmb3.06tr of new notes, and Rmb1.15tr for refinancing.

The bonds had a 10.3 year tenor on average, which was 4.1 years longer than what was seen in 2018. The average launch yield of 3.47% was 42bp lower year-on-year. The average interest rate was 27bp higher than China government bonds, with some regions 60bp higher.

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The MoF has launched celma.org.cn, a public information website covering local government debt at the national level. The beta version of Celma, short for China Electronic Local Government Bond Market Access, went live on December 31, 2019. It will release not only the fiscal data of the local governments, but monthly, quarterly and annual data on the debt quotas allotted to them, their remaining quotas, and information about new bond issuance, interest payments and principal repayments. 

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China’s finance ministry is encouraging foreign banks to participate in local government bond underwriting. It said that the local finance departments are in the midst of making amendments to their bond underwriting rules, including scrapping the limitations on foreign banks participating in local government bond sales as underwriters.

Bank of East Asia (China), Fubon Bank (China) and Deutsche Bank (China) have worked on government bonds issued by the cities of Ningbo, Chongqing, Tianjin, Qingdao and Guangdong province. The MoF said it will work to further open up China’s local government bond market.

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US president Donald Trump will be signing the phase one trade deal with China on January 15.

“I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15,” Trump tweeted on December 31. “The ceremony will take place at the White House. High-level representatives of China will be present. At a later date, I will be going to Beijing where talks will begin on Phase Two!”

The South China Morning Post reported on Sunday that the Chinese delegation will be travelling to Washington for four days from January13 to sign the deal, citing a source briefed on the matter. Neither the US nor China has confirmed the trip.

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The manufacturing Purchasing Managers’ Index (PMI) flattened at 50.2% in December, according to data published by the National Bureau of Statistics on December 31. New export orders sub-index recovered by 1.5 percentage points to 50.3% in December. However, both raw material inventory and finished goods inventory sub-indices fell.

The official non-manufacturing PMI moderated to 53.5% in December from 54.4% in November.

The Caixin manufacturing PMI, which focuses on small and medium-sized enterprises, eased to 51.5% in December from 51.8% in November. The decline was mainly led by a drop in new orders and output sub-indices, which fell by 0.5 percentage point and 0.1 percentage point respectively.

“Although the stabilisation of the official manufacturing PMI in December looks positive for markets, the dip in the Caixin manufacturing PMI still points to weakness in domestic growth momentum,” Nomura’s Lu wrote in a Thursday note. “We expect the manufacturing PMIs to weaken in coming months and believe the economy has yet to hit the bottom.”

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The Liason Office of the Central People's Government in the Hong Kong SAR replaced former director Wang Zhimin with Luo Huining, according to a statement on the government website on Saturday. Before taking on his new job, Luo was the Shanxi party secretary. Analysts generally viewed the move as Beijing’s hardening stance towards the ongoing protests in Hong Kong.

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S&P (China) Global Ratings has given its third issuer rating onshore since providing the first rating in July 2018. The credit rating agency has given Postal Savings Bank of China an AAA rating.

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China’s State Administration of Foreign Exchange (Safe) holds a 4.2% stake in Euroclear Bank as its fifth-largest shareholder, the Financial Times reported on January 3, citing a regulatory filing from the Belgium-based post-trade service provider.

The Chinese FX regulator has been holding the shares for at least four years. The ownership was only made public because Euroclear is planning to adjust its shareholder structure. Safe controls the stake through Kuri Atyak Investments, a holding company registered in the British Virgin Islands.

By Addison Gong, Rebecca Feng
06 Jan 2020