Coronavirus bonds: China must be vigilant
Chinese regulators will have to strike a balance between supporting the use of the domestic bond market to help combat the deadly outbreak of the coronavirus, now officially known as Covid-19, and preventing the misuse of it.
As the Covid-19 outbreak persists in the mainland and elsewhere, China seems to be doing everything it can to stabilise the financial markets.
Led by the likes of People’s Bank of China, China Banking and Insurance Regulatory Commission and the Ministry of Finance, regulators at central and local government levels have rolled out more than 30 different supportive measures over the last two weeks.
They also made it easier for companies with funding needs to come to the bond market, setting up ‘green channels’ for fast-tracked issuance, extending deadlines for those temporarily not able to print, relaxing the restrictions on the use of bond proceeds and lowering the associated fees.
Chinese policy banks, hospital builders and pharmaceutical firms last week issued the first batch of bonds to help prevent and control the epidemic. While only China Development Bank’s Rmb13.5bn ($1.94bn) deal was clearly labelled a ‘Novel Coronavirus Prevention Bond’, all or at least part of the proceeds of every deal were intended to be used to fight for the same cause.
That trend is quickly catching on. By Thursday this week, more than 20 issuers had priced or will soon price deals relating to the coronavirus, with or without a clear label, according to public filings.
The range of issuer types has also expanded, now taking in airline companies, automobile manufacturers, food suppliers, local government financing vehicles and brokerages. But unlike those that came out earlier, most of the firms have now decided to label their offerings clearly as coronavirus-related.
The benefits of labelling their deals clearly are evident: more publicity, better investor participation, and lower funding cost.
Existing issuers have provided enough justifications in the bond prospectuses. But since issuance could potentially last for at least a couple of months, the market needs to be vigilant about any exploitation of these coronavirus bonds. In the midst of a tough funding environment for Chinese borrowers, there will no doubt be a temptation to exaggerate the relevance of the coronavirus to financing.
China’s three policy banks ─ Agricultural Development Bank of China, China Development Bank and Export-Import Bank of China ─ came out in size, but the majority of the deals so far have been much smaller. They have typically been issued by non-financial companies in China’s interbank market and regulated by the National Association of Financial Market Institutional Investors, or Nafmii.
Nafmii, however, requires only 10% of the proceeds from each bond to be related to the prevention and control of the outbreak for companies to put a clear coronavirus label on their deals. Issuers also do not need to add the label during the approval or registration process, but can tack it on just before the issuance stage.
While these relaxed requirements show support from Chinese regulators, a higher barrier for entry will help make sure that all companies that sell coronavirus bonds have a genuine need to do so, instead of having some issuers abuse the label in exchange for cheaper prices ─ or simply to be able to print a deal in the first place.
Introducing a step of pre-registration certification and an after-issuance verification process would also help avoid the misuse of the proceeds.
Companies should also be made aware of the consequences before they start taking advantage of the bond market. China has already said it will have zero tolerance on behaviour such as hiking up prices for food and medical supplies, including surgical and N95 masks, amid the outbreak.
When it comes to the financial markets, the regulator will need to pull off a balancing act between showing support and adopting a tougher stance. There is little margin for error as the country tries to restore market confidence.