[SHANGHAI] The Shanghai Stock Exchange banned individuals from investing in bonds privately issued by small and medium enterprises (SMEs), the latest in a series of steps to tighten regulatory control of the high-yield, high-risk fixed income market.
The ban, which comes into effect immediately, also bars institutions from selling individual investors any product containing bonds issued by SMEs, widely known in the industry as "junk bonds." Firms established by limited liability partnerships are also banned from investing in junk bonds, according to new rules published on Wednesday on the exchange website, www.sse.com.cn. "Those above-mentioned investors who already own such bonds can hold or sell them, but they are banned from building fresh positions," the exchange said.
The SME bond market was launched in early 2012 in order to help develop China's wider bond market and to provide an alternative financing channel for SMEs, many of which have difficulty accessing bank credit.
However, analysts soon began warning that the market was distorting investors' behaviour, as they regarded the high yield bonds as virtually risk free because local governments were unwilling to allow even small, economically insignificant issuers to default.
Concerned about a potential explosion in non-performing debt, Beijing has moved to systematically suppress the high-yield bond market, most recently by preventing weaker issuers from using the bond market as a refinancing tool.
That has pushed investors out of low-grade bonds, widening the spread between high-grade AAA-rated bonds and lower-rated AA bonds.
The Shanghai bourse also ordered guarantors and underwriters of SME bonds to fully investigate the financial status of their clients and coordinate with regulators in a timely manner if problems arise.
State media have noted that this move will increase funding pressure on smaller Chinese firms, "adding frost to snow," as one underwriter quoted in the semi-official China Business News put it.
However, unlike in many other countries, many Chinese SMEs are not private companies, but are small subsidiaries of state-owned firms.