Some China Brokerages Halt Bond Repos Amid Credit Risks

(Bloomberg) -- At least two Chinese brokerages have halted new exchange-listed bond repurchases after rising credit risks damped the value of the pledged notes, according to people familiar with the matter.

  • China Securities Investor Protection Fund, a state-owned protective body, issued a notice dated March 20 to brokerages warning them on risks developing in exchange-listed bond repurchases, according to a document seen by Bloomberg
  • China Securities Depository and Clearing Corporation also issued a notice to brokerages earlier this month, asking them to check on risks related to bond repo transactions amid rising defaults, and send feedback before March 29, according to people familiar with the matter

Key Insight

  • The record pace of bond defaults among Chinese companies is having an impact on the country’s repo market, where investors pledge notes to raise funds.
  • Some private funds and institutional investors failed to wire funds to designated accounts after pledged bonds sold by China Minsheng Investment Group Corp. and Hawtai Motor Group Ltd. fell in value, the document showed
    • CMIG’s notes have nosedived since January amid concerns of its tight liquidity and heavy debt pile. Hawtai Motor’s 6.2 percent 2021 note was indicated at 75 yuan earlier this month
  • As a result, four brokers repaid 120 million yuan ($17.8 million) borrowed by six private funds that had pledged bonds sold by CMIG; another two brokers repaid 122 million yuan that four institutional investors had obtained by pledging bonds issued by Hawtai
  • China Securities Investor Protection Fund couldn’t immediately comment when contacted; calls to China Securities Depository and Clearing Corporation went unanswered

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  • Chinese companies reneged on about 120 billion yuan of local bonds last year and another 21.8 billion yuan so far in 2019
  • Investors can use corporate notes as collateral at Shenzhen stock exchange to obtain funds whereas they can only pledge government bonds for borrowing at the Shanghai bourse
  • Pledged repo trading volume in Shanghai and Shenzhen stock exchange totaled over 49 trillion yuan in March, according to Bloomberg calculation based on exchange statements

Analyst Comment

  • “Brokerages should tighten its risk control over entities that pledge bonds for funding, and diversify the collateral base,” said Wang Yifeng, researcher from China Minsheng Bank Co. “If securities firms’ risk control is too relaxed, they may be forced to repay the shortfall incurred by their clients.”

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