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China bonds: transparency push a clear win

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By Rebecca Feng
08 Jul 2020

The Shanghai Clearing House’s decision to give bond issuers insight into the holders of their debt is a smart move. China has enough regulation; what it lacks is information.

The Shanghai Clearing House, which clears and settles the majority of credit bonds in China’s interbank market, has taken an important step to improve transparency in the domestic bond market. It will provide issuers with a full list of investors holding their outstanding bonds.

That information was previously available to issuers, but they had to justify the request ─ pointing to a planned investor meeting, for instance. The old system put unnecessary requirements on issuers, ignoring the fact that keeping a close eye on their investors is in itself a worthwhile exercise for bond issuers.

The service will be free of charge for the time being, GlobalCapital China understands, and borrowers will have the option to get the updates on a monthly, quarterly or annual basis. At least five companies have already signed up to the service, with more set to follow.

The move has been greeted with an element of fear among local DCM bankers, who privately admit to bookrunning practices that fall far below international standards. That includes misrepresenting investors in the order book, a trick that will now be harder, if not impossible.

The move will encourage competition. By allowing issuers to regularly get a list of investors ─ one which can easily be shared with bankers ─ the change will give plucky bookrunners a better chance of stealing investor relationships from their rivals.

That is no bad thing. The relationships between banks and investors should be built on mutual respect, trust and a prolonged period of working together with minimal headaches. If you can only keep a client by keeping them secret, you don’t deserve them.

The move also ties into a wider push among Chinese regulators to improve transparency.

The China Securities Regulatory Commission, the country’s top securities regulator, has delivered dozens of speeches, statements and regulatory updates emphasising the importance of information disclosure and fair market practices.

The National Association of Financial Market Institutional Investors, one of the regulators in the interbank bond market, even named and shamed two securities houses for cutting underwriting fees to new lows. Soon after the warning, the regulator brought together 90 banks and securities houses to sign a pledge to avoid bidding with fees below cost or engaging in other highly questionable — and at times, unethical — underwriting practices.

Even the National People’s Congress weighed, when it published a new draft of China’s criminal law last week.

China’s top legislature has made punishments for financial crimes much harsher now. Committing serious financial fraud in the stock and bond issuance process can lead to more than five years in prison. Previously, the imprisonment time was capped at five years.

These initiatives all make sense. But market problems are best solved by market mechanisms. By allowing issuers to keep a closer eye on their own investor base, the Shanghai Clearing House is giving clear incentives to bookrunners to improve their distribution capabilities ─ and improve the health of China’s bond market in the process.

By Rebecca Feng
08 Jul 2020