Eased Rules, Booming Market: Corporate Bond Edition

Rule changes in 2014 helped pave the way for the stock market bubble, now rule changes in the bond market may be having the same effect. On the whole, neither the stock nor bond market rule changes are negative, quite the opposite. However, the market isn't being left alone to cope with the new rules. Instead, the rule changes are accompanied by a political push to expand the asset class. The result is a misallocation of capital as investors, regulators and issuers are overwhelmed. Not too unlike the 2008 lending push, which overwhelmed banks' ability to find good credits, borrowers' ability to find good investments, and regulators ability to monitor the process.

Caixin: Will Investors Get Burned in Bond Market Fire?
The boom began in June, just before a wave of stock sell-offs in July and August plunged the Shanghai and Shenzhen bourses to their lowest index levels since 2007. In fact, some analysts say the bond-buying spree and stock sell-off underscored an investor shift into the former and out of the latter.

The value of new corporate bond issues hit a single-month record of more than 100 billion yuan in August, or about 72 percent of the issues last year, according to financial data provider Wind Info. These added to 93.2 billion yuan worth of medium-term notes sold by companies and 19.5 billion yuan worth of so-called enterprise bonds issued by state-owned companies on the interbank market.

Property developers issued about half of the 500 billion yuan worth of corporate bonds sold between January and September 1, Wind Info said. These developers raised only 23.5 billion yuan by issuing bonds in 2014.

...Critics say the CSRC effectively weakened supervision of the corporate bond market in order to promote marketization. As a result, they say, some recent bond issuers may have pushed dangerously low-quality paper into investor hands.

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