China has published rules barring the use of lower-rated corporate bonds as collateral in short-term borrowing in a move to reduce financial risk, Reuters reported on Saturday.
The rules, which apply to the repurchase agreement (repo) business in the exchange bond market, were announced amid rising corporate defaults and the Chinese central government's deleveraging campaign.
Effective Saturday, new corporate bonds rated below AAA, or bonds sold by issuers graded lower than AA, could not be used as collateral in repos, according to rules released on Friday by the State-owned China Securities Depository and Clearing Corp (CSDC).
The rules are aimed at "strengthening risk controls in the collateral-backed repo business, and promoting the stable and healthy development of the exchange bond market," the CSDC said.
China has witnessed a surge in corporate bond defaults in recent years as the economy slows and the government steps up economic restructuring aimed at eliminating "zombie" companies in struggling sectors such as steel, coal and shipping.
In 2017, more than 5.5 trillion yuan ($797.36 billion) of corporate debts fall due, meaning companies are under immense repayment pressure, as tighter monetary policies have increased companies' liquidity risks, rating agency China Chengxin has said.
The rules, which could make borrowing more difficult in the exchange bond market, are in line with China's determination to reduce leverage and avoid asset bubbles.
