Key Points:

  • Important move in developing a Chinese bond market
  • China to test issuance of corporate bonds with selected listed companies
  • Companies applying to issue bonds must meet qualifications

The China Securities Regulatory Commission (CSRC) promulgated the Measures for Pilot Corporate Bond Issuance on August 14, 2007 in a move that marks the official start of corporate bond issuance in China.

Corporate bond issuance will first be tested with selected listed companies. Initially, pilot companies will be restricted to companies listed on the Shanghai and Shenzhen stock exchanges as well as domestic joint-stock companies issuing foreign capital stocks abroad.

According to CSRC, the introduction of the pilot measures is an important move in implementing the plan of “accelerating the development of the bond market” adopted at the National Financial Work Conference at the beginning of this year. It has a significant bearing on the development of the bond market, expansion of corporate financing channels, diversification of securities investment products, improvement of the financial market system and coordinated development of the capital market in China.

According to the Measures, corporate bonds are bonds issued by a company pursuant to the statutory procedures for guaranteeing the payment of the principal plus interest within a time limit of more than one year, as agreed upon between the parties concerned. The Measures clearly require that a company applying to issue bonds possess the following conditions:

  1. The production business of the company must comply not only with the provisions of the laws and regulations and the Articles of Association of the company, but also to the policy governing the production industry of the state;
  2. The company must have a sound internal control system;
  3. The company must possess a sound credit rating from a credit rating institution;
  4. The audited net asset value of the company at the end of the latest period must meet the relevant provisions of the laws and administrative regulations;
  5. The average annual distributable profit realized in the most recent three accounting years must be equal to or more than one year’s interest that the company would pay on the proposed bond issue; and
  6. The remaining value of aggregate bonds after the current issuance should not exceed 40 percent of the company’s net asset value at the end of the latest period. The remaining value of aggregate bonds of a finance company is computed according to the relevant provisions of finance enterprises.

A company’s board of directors is required to formulate a schedule for issuance of corporate bonds, and the shareholders’ meeting or the general meeting must decide matters including how many bonds to issue; how many will be allotted to shareholders; the time limit of the bonds; how the funds raised from the bonds will be used and the term of validity of the decisions made. Also, the sponsor must submit an application to the CSRC. The CSRC decides whether to entertain the application within five working days of receiving the application materials. If the CSRC decides to do so, it must make a decision on the application after its preliminary examination or examination by the Committee on the Examination and Verification of the Issuance of Corporate Bonds under special procedures.

The sponsor of the current issuance or another institution accredited by the CSRC fills the position of the entrusted administrator of bonds. The entrusted administrator of bonds is required to act in the best interest of the bondholders; a conflict of interest between them is not permitted. The Measures also specify relevant recovery procedures when there has been a breach of the Measures by the company, such as the making of false records, misleading representations or significant omissions by the sponsors or credit rating institutions.

The promulgation of the Measures is an important act by the CSRC toward implementing arrangements for “bond market development acceleration,” as discussed during the National Financial Work Conference held earlier this year. It represents the formal commencement of issuance of Chinese corporate bonds.