(Yicai Global) Aug. 19 -- China’s central bank and five other government agencies jointly issued a policy banning structured bond issuance as a precaution against financial risks. Less-qualified issuers tended to raise capital in this way.

The authorities will promote research into regulations governing corporate bonds, according to a document posted on the website of the People’s Bank of China yesterday. They will push for the gradual unification of rules and standards on issuance, trading, information disclosure, investor protection and other matters in the corporate bond market, it added.

Per the document, bond issuance should be in line with national economic development and industrial policies, while structured debt sales are prohibited. Sellers should also guide investors to improve risk identification capabilities, with exploration of class action and settlement mechanisms between the parties involved.

In structured bond issuance, less-qualified issuers, or those with poorer credit, first buy asset management products from brokers, trust or fund companies. Third-party institutions then invest in the bonds with the money raised at a pre-agreed interest rate.

This workaround, which helped issuers sidestep restrictions imposed by credit ratings, began in 2017. At that time it eased the liquidity pressure on less-qualified companies and local government financing vehicles. But defaults later jolted the markets.

Chinese regulators stepped up oversight of this type of bond product at the end of 2019. The China Securities Regulatory Commission said in February this year that it will investigate and punish all kinds of violations in accordance with the law.

In the document published on the PBOC’s website yesterday, the six government agencies also proposed to prevent hidden debt risks of local governments, clarify the line of responsibility between government and businesses, and demarcate credit limits among government, policy financial institutions, state-owned firms and LGFVs.

To further promote the reform and opening-up of the corporate bond market and its high-quality development, the document said, China’s interbank bond market and the exchange bond market should be opened to the outside world.

Access and cross-border capital management of the bond market by foreign institutional investors should also be unified, it added

Editor: Peter Thomas