By Morgan Davis and Matthew Thomas
Chinese bond issuers now dominate the sale of G3 bonds, with 48.7% of the $189.5 billion sold in Asia ex-Japan this year coming from the country. But while Chinese issuance has become as regular as clockwork in the offshore market, the country’s bond market regulator is more akin to a stopped clock.
The National Development and Reform Commission (NDRC), a state planning body with the power to approve offshore bond plans, has a reputation as a high hurdle to offshore debt issuance.
Officially, the regulator stepped back from approving deals several years ago, moving to a system where only registration is required. In practice, since the regulator often decides not to acknowledge that a deal has been registered, it is simply an approval process by a different name.
And then the regulator blows hot and cold. It left too many issuers languishing last year when it became increasingly unwilling to allow bonds to be registered. This year it has an altogether different attitude, handing out quotas at a breakneck pace. Issuers complain about a laborious process of approval, with city, provincial and state departments all needing to give a green light to a deal before it can hit the market.
The Reserve Bank of India, India’s central bank, also has a reputation for being a difficult taskmaster for those issuers hoping to raise debt in the overseas markets. It is prone to tie Indian issuers up in red tape, relying on an exhaustive and sometimes restrictive set of regulations to determine the flow of deals offshore.
The RBI is stringent on filing standards, forcing issuers to file frequent updates about even small changes in the terms of a deal. It also tries to direct the market, attempting to replace the invisible hand of Adam Smith with the very visible hand of Urjit Patel, the governor. It sets minimum tenor limits, dictates how much of a bond can be held by non-Indian investors and gives upper boundaries for pricing that ensure some riskier issuers can simply not access the market.
Last summer, issuers were reminded of how tight RBI regulations can grind new issuance to a halt. Foreign investors found themselves cut off from the rupee-denominated bond market as their holdings of rupee debt edged too close to the regulator’s cap on foreign investment. But due to the way some offshore deals were structured, this also cut off funding access for some dollar bond issuers.
It is remarkable that, despite its sloppy bond regulatory framework, Chinese offshore bond issuance is such an overwhelming part of the market
It took months before the cap on foreign rupee holdings was raised and the trickle of deals started to flow again. The two regulators have much in common. They are both important players in Asia’s offshore bond markets, casting a shadow over any discussions a bank has with its Indian or Chinese clients. They have a reputation for scuppering deals as often as encouraging them, for interfering with the natural function of the market and for using bond flows as a backdoor means of controlling the currency.
But more interesting is where they differ. The NDRC and the RBI represent opposite poles of the spectrum in one crucial aspect — the clarity of their regulations. Bankers may complain about the RBI’s sweeping rules on ‘external commercial borrowings’, as the central bank calls offshore debt, but they at least know what those rules are. The central bank has published extensive details of its rules online, including a 49-page framework and a list of 60 frequently asked questions that was last updated on June 7, just a week before this article was written.
The NDRC, by contrast, is an enigma. The regulatory body has occasionally published guidelines, such as when it moved from the approval to the registration system in late 2015. But they are vague, written in the cryptic legalese much loved by Chinese officials. This forces bankers into a certain amount of guesswork, something made worse by the fact that some explicit rules – such as the need to register offshore loans – appear to be applied only half-heartedly.
It is remarkable that, despite its sloppy bond regulatory framework, Chinese offshore bond issuance is such an overwhelming part of the market. That is clearly a testament to the huge growth of China’s banks and companies, but credit should also go to the funding officials and bankers who have learned to navigate a regulatory maze with few signposts and plenty of sharp turns.
Chinese and Indian issuers continue to come to the bond market, albeit in vastly different numbers. Chinese issuers have sold $92.3 billion of G3 bonds this year, compared with $3.88 billion from India. But this deal flow is happening despite, not because of, the regulators. There may be only a few ways to regulate well, but there are plenty of ways to regulate badly.