Chinese Central Bank Flags “Zero Tolerance” for Illegal Conduct on Bond Market Following Spate of Defaults

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The People’s Bank of China (PBOC) has flagged a crackdown on irregular behaviour on the bond market following a wave of defaults in the last two months of 2020.

PBOC recently convened a conference on the development of bond market legal systems that was helmed by deputy-governor Pan Gongsheng (潘功胜).

Pan highlighted “systemic inadequacies” in the legal system for the Chinese bond market, as well as the need to “hasten supplementation of these legal system shortcomings.”

The PBOC deputy-governor called for “showing zero tolerance for illegal conduct on the bond market, comprehensively raising the rule of law level of the bond market, and continually firming up the credit foundations of the bond market.”

Pan’s remarks arrive following a wave of defaults that first picked up steam after Yongcheng Coal & Electricity Holding Group – an SOE based in Henan province, announced on 10 November that it was defaulting on one billion yuan (approx. USD$152 million) in short-term bonds that it had issued just weeks previously.

A meeting of China’s Financial Stability and Development Committee (FSDC) convened on 21 November said that Chinese regulators would target the “behavioural” factors behind bond defaults, in addition to “cyclical” and “comprehensive factors.”

The meeting forecast that bond defaults would continue to occur in future, but that “debt evasion conduct will be corrected” while the “predictability of defaults is increasing, associated impacts are weakening, and impacts on the market will marginally decline.”

The defaults prompted a sharp increase in the number of cancelled bond issues in the final months of 2020. Data from Wind indicates that the period from 1 November to 16 December has seen the cancellation of at least 182 bond issuances involving a total sum of 138.2 billion yuan. This compares to cancellations of just 61.389 billion yuan in September and 34.25 billion yuan in October.

2020 has seen a total of at least 91 bond defaults by Chinese state-owned enterprises (SOE), with a default balance of 108.7 billion yuan, while private Chinese companies have defaulted on at least 100 bonds, for a default balance of 102.7 billion yuan.

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