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06.17.2014 20:06

False Start for New Bonds as Regulators Fiddle

The nation's first credit securitization bonds for stock market trading are in limbo because regulators don't see eye to eye
By staff reporter Zhang Yuzhe

(Beijing) – The central bank has put the brakes on a proposed credit securitization bond product that had been approved by the banking regulator and was poised to debut on a bourse.

The decision by the People's Bank of China to block the securitization bonds, at least temporarily, underscores friction among regulators over rules for the country's emerging credit securitization market.

The central bank jointly oversees the market, which is in a pilot phase, with the China Banking Regulatory Commission (CBRC), which had approved the asset securitization plan.

Companies seeking bond investors and their underwriters have complained about inconsistent, sometimes contradictory market rules. Regulatory agency efforts to iron out the kinks so far have had limited effect.

Just a day before the central bank decision, the Shanghai Stock Exchange announced that trading would begin for the securitization bonds based on 2.63 billion yuan worth of consumer loans made by Ping An Bank. It did not say when trading would begin.

The proposed bonds would be the first securitization product for bank loan assets traded on a Chinese stock exchange. Similar products have been limited to the interbank market, which is regulated by the central bank.

The central bank suspended the Ping An bond issue, said a source close to the regulator. No reason was given, but the source said central bankers were not informed about the product before it was set to launch. It's unclear how long the suspension might last.

"There are still procedures to be completed and the date of issuance cannot be fixed yet," said a source close to the lead underwriter, Guotai Junan Securities.

One financial sector executive, who asked not to be named, criticized regulators for the bond project's false start.

"The regulators should have reached consensus among themselves," the executive said. "Institutions should not have been sent down a path to explore on their own while repeatedly filing for approval," prompting "very high costs and low efficiency."

This is not the first time the central bank and CBRC have disagreed over credit securitization market rules. For example, the source said, the central bank thinks all qualified institutions should be allowed to sell securitized bonds at any time without repeatedly seeking official permission. CBRC opposes this proposal, citing risks.

Meanwhile, the central bank is apparently worried that trading securitization bonds on stock exchanges may compromise its effort to improve and strengthen the interbank bond market. That effort began in the wake of scandals leading to the arrests of several major bond traders in April 2013.

Officials have shut down accounts often used by rogue traders, adjusted payment and settlement rules, and tightened investor screening.

Some of the central bank's bond rules differ from those written for bonds traded on stock exchanges.

The regulators do not see eye to eye over who should be allowed to buy credit securitization products. For example, the Shanghai bourse announced these investors can include but are not limited to financial institutions, trusts and wealth management funds. It also said buyers can include non-financial institutions with at least 1 million yuan in net assets as well as other investors deemed qualified by the stock exchange.

The exchange's relatively liberal policy toward qualified investors does not sit well with the central bank, according to the central bank source.

Financial sector critics of China's bond market regulations, which cover interbank and stock exchange trading, often complain of fragmentation.

Bonds of various types may be supervised or come under rules issued by the central bank, CBRC, the China Securities Regulatory Commission (CSRC), the National Development and Reform Commission (NDRC), and insurance regulators.

To streamline the process, an inter-ministry cooperation mechanism was set up in August aimed at encouraging various regulators to share information and coordinate activities. A separate coordination mechanism focusing on corporate bonds is being led by the central bank's Governor Zhou Xiaochuan, and includes NDRC and CSRC officials.

(Rewritten by Wang Yuqian)

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