China Corporate Bond Market Blue Book A 2019 Fitch China Research Initiative Publication CHINA CORPORATE BOND MARKET BLUE BOOK About Fitch Fitch Ratings opened its mainland office in Beijing in 2005, landscape. Through the Fitch China Research Initiative, we aim making it the first international ratings agency to operate in to support the efforts of investors by providing objective and China. Today the agency has offices in Beijing and Shanghai, and insightful research – both into corporate sectors within China continues to rapidly expand its mainland analytical presence. that are yet to issue, or are in the early stages of issuing, as well as into the potential issuers of the future. In mid-2014, Fitch created a separate research team of Mandarin-speaking analysts, based in its offices in China, with a Our Blue Book series represents almanac-style volumes with remit to produce world-class objective and insightful research on a tiered approach dependent on investor interest and areas of corporate sectors in China. This research focuses on helping to focus. The first tier looks into market structures and the operation educate and familiarise investors with the key credit aspects of of individual sectors, the second tier looks at key industry players corporate sectors that are unrated, or that consist of just a few and relative rankings, and the third tier dives deep into the credit rated entities. aspects of an individual entity or groups of unrated entities. The potential that a fully liberalised financial landscape in As always, the authors are at your disposal for discussion, feedback China represents for global investors is beyond compare. Fitch or comments via email or their direct line numbers which are feels that full liberalisation is unlikely to be completed in the provided in the report. We hope that you enjoy reading this immediate future, as China continues to open up and play Blue Book as we continue with our efforts to tailor and produce an ever-more important role in the global economy, while its research that meets the needs of the global investor community. corporate sectors will produce an increasing number of entities issuing international bonds. In this respect, we have already seen serious global investors starting to devote considerable effort in understanding and familiarising themselves with aspects of the Chinese corporate BUDDHIKA PIYASENA Head of Asia-Pacific Corporate Ratings Group Analysts SHUNCHENG ZHANG JENNY HUANG YING WANG +86 21 6898 7982 +86 21 6898 7979 +86 21 6898 7980 [email protected] [email protected] [email protected] A 2019 Fitch China Research Initiative Publication 1 © Copyright 2019 Fitch Ratings October 2019 A Fitch China Research Initiative Publication All rights reserved. No part of this publication may be reproduced, transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Fitch Ratings Limited. Fitch Ratings – China Unit 01-1, 68/F, Fortune Financial Center 5 Dongsanhuan Road Chaoyang District Beijing, China 100020 Fitch Ratings – China 3401, 34/F, Shanghai Tower No.479, Lujiazuihuan Road Pudong Shanghai, China 200120 2 www.fitchratings.com CHINA CORPORATE BOND MARKET BLUE BOOK Contents Defaults More Common; Documentation Nascent Stage for Credit Derivatives 05 and Legal Framework Still Evolving 31 06 Regulatory Updates 32 Domestic Credit Ratings Rising Defaults and Credit Differentiation Internationalisation of the Chinese 11 40 Bond Market Capital-Intensive Sectors Still Dominate Appendix I: China’s Bond Market Structure 17 Issuance; Property Issuance up 45 SOEs (Including LGFVs) Appendix II: Investor Base in Onshore 19 Dominate Issuance 48 Corporate Bonds Increase in LGFV Bonds Appendix III: Administrative Measures 20 50 for Exchange Corporate Bond Issuance, January 2015 22 Major Corporate Issuers 51 Appendix IV: Corporate Panda Bond Issuers New Products Appendix V: Onshore Corporate 25 52 Bond Defaults 26 Key Features of Domestic Corporate Bonds 28 Slowly Enhancing Bond Documentation A 2019 Fitch China Research Initiative Publication 3 4 www.fitchratings.com CHINA CORPORATE BOND MARKET BLUE BOOK Defaults More Common; Documentation and Legal Framework Still Evolving Lower Regulatory Entry Barriers Issuance Dominated Bank of China’s (PBoC) statement to China’s bond market had grown to by LGFVs and SOEs facilitate bond issuance from the private sector. Yet CRMWs have yet to gain CNY85.7 trillion by end-2018 in terms of China’s local government financing traction among investors despite the the principal amount of bonds outstanding, vehicles (LGFV) accounted for around surge, as the referenced instruments the second-largest after the US. The one-fourth to one-third of annual are mainly bonds issued by higher-rated corporate bond market grew from CNY11.6 corporate issuance during 2014-2018, corporates rather than those lower- trillion at end-2014 to CNY19.0 trillion. and represented an increasing portion rated ones for which investors have real China’s exchange bond market, though of outstanding corporate credits (2018: hedging needs. At the same time, current yet to approach that of the interbank 37.5%). SOEs’ (including LGFVs) share CRMWs do not cover all credit events. market, surged to CNY9.0 trillion from by issuance amount reached 84.3% in CNY2.6 trillion, propelled by the regulator’s 2018 despite a moderate retreat of 5 expansion of the pool of eligible issuers to percentage points (pp) from the 2014 Intensified Domestic Rating all corporates in January 2015. Exchange level, as more LGFVs – typically owned by Agency Competition corporate bonds have become the largest local governments – tapped the onshore Competition among local rating agencies corporate bond category. Meanwhile, a market with relatively small deal sizes. has intensified over the past four years. registration-based mechanism is likely The SOEs’ dominance can be attributed There are still minimum rating thresholds to become the norm for primary bond to their leading roles in infrastructure for bond investment set by the regulators. issuance. However, regulatory integration investment and a favourable position Consequently, almost half of domestic has been progressing slowly as the in accessing financial resources and corporate bonds by outstanding amount regulators compete to expand their obtaining government support. were in the ‘AAA’ domestic rating category jurisdiction rather than relinquish control, as of end-2018. The share of the ‘AA’ and policy interventions are unlikely to Slow Progress in Bond category-rated issuers by issuer count disappear completely. Documentation climbed by 10pp from end-2014 to 75.2%, as more private companies with Yet despite the increase in cross-default Rising Onshore Defaults weaker credit profiles became eligible to provisions in onshore corporate bond tap the onshore bond market. Onshore default rate by issuer count indentures in recent years, the timeliness climbed to 1.03% in 2018 from 0.17% in of informing bondholders of related 2014 due to tightened credit availability defaults is questionable, especially defaults Growing Internationalisation; resulting from the government’s on privately placed debt. Furthermore, Limitations Remain deleveraging efforts, local governments’ regulators have not standardised the We expect foreign investors’ participation greater tolerance towards defaults, rules for bondholders’ meetings, and legal to increase as the Chinese bond market and slowing economic growth. Around enforceability of decisions by bondholders’ has been included in a number of global 80% of the onshore defaults by both meetings can be weak. Restrictive indices, although foreign investors’ holdings issuer count and principal amount were covenants on debt incurrence, restricted in total outstanding bonds has remained from the private sector, being more payments, and other actions that are low at 1.9%, up only slightly from 1.5% at vulnerable than state-owned enterprises detrimental to bondholders’ interests are end-2014. Relatively weak public disclosure (SOEs) to external funding market still relatively rare. and corporate governance, reliability of volatilities – and therefore face greater domestic ratings and an immature post- liquidity and/or refinancing risk under Nascent Credit Derivatives default legal framework remain hurdles tight credit conditions. Most onshore The initial launch of credit risk mitigation for foreign investors to boost their credit defaults have yet to show a clear path warrants (CRMW) and credit risk exposure significantly. The Northbound towards resolution, due to frequent mitigation agreements (CRMA) between Trading Link of Bond Connect that local government intervention with a late 2010 and early 2011 failed to form commenced in July 2017 allows overseas preference for reorganization rather an active market for credit derivatives investors from Hong Kong and other than liquidation and long-drawn-out due to the lack of credit events and regions to invest in the domestic interbank legal proceedings. market liquidity. In October 2018, 50 bond market without any quota limits; CRMWs linked to private companies’ 503 foreign institutions were registered as bonds were issued following the People’s eligible foreign investors as of end-2018. A 2019 Fitch China Research Initiative Publication 5 China Corporate Bond Market Fitch published its inaugural China Corporate Bond Market Blue more frequent in the domestic market. This report