China tightens regulation in US$580 billion bond fund market: sources

CHINA’S securities regulator has tightened risk control in the country’s US$580 billion bond fund market, reducing the proportion of riskier debt mutual funds can hold and curbing leverage, said three people familiar with the matter.

Under the rules, new bond funds can invest up to 20 per cent of portfolios in bonds rated AA+ compared with 50 per cent previously, the people told Reuters. Remaining investment must be in top-rated, AAA bonds.

The China Securities Regulatory Commission (CSRC) has also prohibited the use of leverage when investing in AA+ bonds, the people said, eliminating one method of potentially pushing up returns.

The changes come amid rising default in sectors such as property that suffer from a slowing business environment as well as the government’s drive to restructure the economy.

The CSRC did not immediately respond to Reuters’ request for comment.

Existing funds will not be affected by the new rules, the people said, declining to be identified as they were not authorised to talk to the media on the matter.

The changes are already reflected by two funds launched in March.

Hexa Asset Management and Harvest Fund Management in their sales prospectuses said AA+ bonds will account for no more than 20 per cent of holdings, whereas the proportion of AAA bonds will not be lower than 80 per cent. REUTERS