Bonds Jul 20

Eat the weak 

China calls for strong companies to take over failing firms as it seeks to shore up bond market 

Eat the weak 

(ATF) Chinese officials have called on strong firms to buy out weaker ones in a bid slow a spate of damaging corporate failures that threaten to weaken the nation’s bond market. 

A weekend directive from the China Securities Regulatory Commission (CSRC) called for “organisational management innovation” in the securities and fund industry, which mainly reads as a green light with full regulatory support for stronger firms to begin absorbing rivals through mergers and acquisitions. It also seeks to boost employee ownership of company stocks to bolster finances. 

The move is part of measures taken by authorities to shore up the bond market as outflows from fixed-income funds soar amid rising defaults and failures by debt-laden private companies. Measures will also include the creation of a “one-stop shop” to make it easier for qualified investors to access the huge market.

The first official order is to “encourage industry institutions to implement market-based mergers and acquisitions and reorganisations and to achieve rapid development in terms of capital strength, management level, and information technology”. The second order, is to “support industry institutions to directly hold shares or establish asset management plans, trust plans, or limited partnerships.” 

“The China Securities Regulatory Commission supports industry institutions to explore more flexible development positioning and business scope of parent-subsidiary companies under the premise of effective management of unfair competition, prevention of conflicts of interest and transfer of interests,” the notice reads.

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“This policy is a sign of capacity reduction in the financial industry,” the manager of a found company in Shanghai told the 21st Century Business Herald. “The regulation aims to encourage successful companies to take over struggling rivals, thereby preventing a wave of firm closures. This new policy is a major benefit for the securities fund industry and is beneficial to the survival of the fittest in the industry.”

A routine disclosure by the China Fund Industry Association, revealed on July 14, gave another outlook on the issue – the data shows that as of the end of June, public shares trading volume by fund firms decreased by more than 1 trillion yuan compared with the end of May, and capital funds and bond funds have been redeemed in large numbers.

China Youth Venture Capital reported that, due to the adjustment of the bond market, bond funds suffered certain losses, which also led to the redemption of funds by many investors. 

In terms of data, the total share of bond funds in June decreased by 209 billion from May, a decrease of 6.8%, the second consecutive month of declines.

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A strategic analyst of a fund company in Shanghai told 21st Century Business Herald that the concentration of public fund industry has been gradually promoted, and the policy of encouraging M&A was in line with market trends.

Competition in the public fund industry has intensified in recent years. Wind data shows that such firms held assets valued at 2.4 trillion yuan in the first quarter, of which the top 10 fund companies managed 1.4tn yuan, or 58% of the total. That compares with 28% at the end of 2017.

Overall, the current domestic securities firms and fund management institutions are small and fragmented, and their competitiveness is relatively weak. Increased M&A is hoped to create larger and stronger firms to lay the foundation for China’s global liberalisation of its finance sector.

An industry insider said that for a long time, brokerage and fund licenses have increased, opening the system to abuse and creating financial resource risks that would potentially destabilise the market. 

Therefore, it encourages support for the reorganisation of brokerages and fund companies to optimise the capital market. 

“The survival of the fittest will become the new mainstream competition,” the insider said. “If fund companies cannot force their own reforms through and enhance their competitive advantages, they will likely become targets for mergers and reorganisations."

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