Debt capital markets in China: regulatory overview

A Q&A guide to debt capital markets law in China.

The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.

To compare answers across multiple jurisdictions visit the Debt Capital Markets Country Q&A tool

This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarketsdebt-guide.

Contents

Legislative restrictions on selling debt securities

1. What are the main restrictions on offering and selling debt securities in your jurisdiction?

Main restrictions on offering and selling debt securities

Corporate bonds: public offering. Where a company publicly issues corporate bonds, it must meet the following conditions:

  • In the case of a company limited by shares, its net asset value is not less than CNY30 million. In the case of a company with limited liability, its net asset value is not less than CNY60 million.

  • The aggregated outstanding balance of the company's corporate bonds must not exceed 40% of its net asset value.

  • The average distributable profits of the company for each of the three years immediately preceding the application is sufficient to pay for one year's interest on its outstanding corporate bonds.

  • The intended use of the funds raised conforms to industrial state policy.

  • The interest rates of the bonds do not exceed the interest rate levels set by the State Council.

  • The company has been credit rated by a qualified credit rating organisation.

  • Any such other conditions as may be prescribed by the State Council.

Corporate bonds cannot be issued to the public if any of the following circumstances apply:

  • During the last 36 months, false records have been made in the financial and accounting documents of the company, or the company has committed any other major illegal act.

  • False records, misleading statements, or major omissions have been made in the application documents for the present issuance.

  • There is an existing breach of contract, or an existing delay of the payment of principal plus interest, for issued corporate bonds or other debts, and those circumstances still continue.

  • There exist any other circumstances that could severely harm the lawful rights and interests of the investors and/or the social public interest.

No subsequent public issuance of corporate bonds is permitted where any of the following circumstances apply:

  • The amount of funds to be raised in the preceding public offering of corporate bonds has not been fully raised.

  • There are defaults on, or delayed payments of, the principal and interest on the publicly-issued corporate bonds, or other debts, and those circumstances still continue.

  • The stated purpose(s) of the use of the funds raised from the public issuance of corporate bonds are diverted in violation of the provisions of the law.

Privately placed corporate bonds. Under the Project Undertaking of Privately Placed Corporate Bonds, underwriting institutions cannot take cases that are included within the Negative List. Companies are included within the Negative List if any one of the following circumstances apply:

  • The issuer has false records existing in their company's financial and accounting documents for the last 12 months, or has committed other significant illegal activities.

  • The issuer has an existing breach of contract, or delayed payment of principal plus interest with respect to issued corporate bonds or other debts, and those circumstances still continue.

  • The issuer is subject to the regulatory measures adopted by the China Securities Regulatory Commission (CSRC) due to a violation of the Administrative Measures for the Issuance and Trading of Corporate Bonds during the last 12 months.

  • The issuer's financial statements have been issued with an auditors' report containing either an adverse opinion or a disclaimer of opinion by the certified public accountant during the last two years.

  • Issuers that change, without authorisation, the use of the capital raised through a previous bonds issue without making the necessary correction, or issuers whose use of the capital raised through a current bonds issue violates the relevant laws and regulations.

  • Issuers that could potentially severely harm the lawful rights and interests of investors, or the social public interest.

  • Issues that are local financing platform companies. Local financing platform companies are economic entities that are established by local government (and the departments and institutions of local government) through a financial allocation or injection of land, equity or other assets, that undertake a financing function for government investment projects. They have independent legal person status in accordance with the relevant provisions of the State Council.

  • Real estate companies that commit such acts as "idle land", "driving up land prices", "property hoarding" and "driving up the prices of houses", among others, as affirmed by the Ministry of Land and Resources and other departments.

  • Pawn shops.

  • Guarantee companies that are not members of the Securities Association of China (SAC).

  • Small-loan companies that fail to meet all of the following conditions:

    • the establishment or filing of the company is approved by the provincial competent authorities, and the company has been established for at least two years;

    • the company reaches the highest level in provincial supervisory rating or assessment rating for two consecutive years; and

    • the company receives a credit rating result of AA-level or above.

Where the issuer decides that there will be a credit rating for privately placed corporate bonds, that credit rating must be disclosed in the prospectus for those privately place corporate bonds.

Underwriting of corporate bonds. The issuance of corporate bonds must be entrusted to a securities company that is qualified to engage in securities underwriting. Securities companies that are qualified to engage in securities underwriting, the China Securities Finance Corporation and other institutions recognised by the CSRC can sell the privately placed corporate bonds themselves. Underwriting institutions must adopt the mode of exclusive sales or sales by proxy for underwriting corporate bonds in accordance with the relevant provisions of the Securities Law. The issuer and the lead underwriter will enter into an underwriting agreement.

Publicly issued corporate bonds underwritten by underwriting syndicates, or underwriting institutions that are comprised of underwriting syndicates, must enter into an underwriting syndicates agreement. When the corporate bonds are issued by two or more underwriting institutions, all lead underwriters must undertake the primary responsibility jointly and comply with their duties. When the underwriting syndicates are comprised of three or more underwriting institutions, assistant lead underwriters can be set up to help the lead underwriters organise the underwriting activities. Members of the underwriting syndicates must proceed with underwriting activities according to the underwriting syndicates agreement and the underwriting agreement. False underwriting is strictly prohibited.

Enterprise bonds. An enterprise that intends to issue enterprise bonds must satisfy the following conditions:

  • Its size must meet the state requirements.

  • Its financial and accounting systems are in compliance with state provisions.

  • It is capable of debt repayment.

  • It enjoys good economic performance, and is profitable for the three consecutive years preceding the proposed issuance of enterprise bonds.

  • The funds to be raised will be used for purposes in line with state industry policies.

  • The total par value of the enterprise bonds issued by an enterprise must not exceed the net value of its proprietary assets.

  • The coupon rates of enterprise bonds must not be higher than 40% of the interest rates of personal fixed deposits of banks at the corresponding period.

The "Rules for the compilation of legal opinions on the issuance of corporate bonds" ruled that the lawyers must express conclusive opinions clearly on certain matters concerning the issuance of corporate bonds, including but not limited to the following:

  • The approval and authorisation of the issuance.

  • The subject qualification of the issuer.

  • The substantive conditions of the issuance.

  • Issuer's establishment and shareholders (actual controller).

  • The independence of the issuer.

  • The issuer's business and credit standing.

  • Related-party transactions and horizontal competition.

  • The main property of the issuer.

  • The major credits right and liability of the issuer.

  • Drastic changes in the property of the issuer.

  • The tax situation of the issuer.

  • The environmental protection of the issuer.

  • The use of the funds raised by the issuer.

  • Litigation, arbitration and administrative punishment of the issuer.

  • An evaluation of the legal risk of the prospectus.

  • Any other matters the lawyers think should be explained.

Lawyers should clearly announce an overall conclusive opinion on whether the issuer satisfies the publishing requirements of the enterprise bonds, whether the actions of the issuer violate any laws and regulations, and whether the prospectus, and the content of legal opinion cited in its notes, is adequate.

An enterprise that issues enterprise bonds can apply to a recognised bond rating agency for a credit rating. An enterprise must engage a securities business institution to underwrite the issuance of enterprise bonds. Non-securities business institutions and individuals cannot underwrite and/or transfer enterprise bonds.

Financial bonds. Where a policy bank (that is, the State Development Bank of China, the China Import and Export Bank and the China Agriculture Development Bank) intends to issue a financial bond, it must submit to the People's Bank of China (PBOC) an application on the yearly basis for the issuance of a financial bond. Financial bonds cannot be issued without the PBOC's approval. The application for the issuance of the financial bond of a policy bank must include the volume of the issuance, time limit arrangements, manner of issuance, and so on. If any modification needs to be made to the original application, it must be reported in a timely manner to the PBOC for approval.

A commercial bank must meet the following conditions to issue a financial bond:

  • Have a sound corporate governance mechanism.

  • Its core capital adequacy ratio must be no less than 4%.

  • Have a favourable balance for three consecutive years.

  • Have adequate reserves for loan losses.

  • Its risk control indicators must conform to the relevant provisions of the regulatory institution.

  • Have no record of any serious violation of any law or regulation during the last three years.

  • Other conditions as prescribed by the PBOC.

Upon receiving the application of a commercial bank, the PBOC can exempt the commercial bank from one or more of the conditions mentioned above.

An enterprise group finance company must meet the following conditions to issue a financial bond:

  • Have a sound corporate governance mechanism.

  • Its core capital adequacy ratio must be no less than 10%.

  • Its risk control indicators must conform to the relevant provisions of the regulatory institution.

  • Have no record of any serious violation of any law or regulation during the last three years.

  • Other conditions as prescribed by the PBOC.

The issuance of a financial bond must be subject to a credit rating by a competent credit rating institution. If the financial bond is issued towards particular investors, it may, upon the consent of the underwriters, be exempt from this credit rating requirement.

When issuing a financial bond, the issuer must form an underwriting syndicate. The underwriters may, during the period of issuance, distribute the financial bond they have underwritten to other investors. The issuer cannot purchase the financial bond issued by itself, nor can it do so in any disguised form.

The financial bond can be underwritten by way of agreement or bidding. An underwriter must be a financial institution that meets the following conditions:

  • Have a registered capital of no less than CNY200 million.

  • Have relatively strong capabilities in distributing bonds.

  • Have qualified professionals engaging in the bond market business and bond distribution channels.

  • Have committed no serious illicit act within the last two years.

  • Other conditions as required by the PBOC.

Debt financing instruments. Debt financing instruments can be publicly or specifically issued on the inter-bank bond market.

Enterprises must issue short-term financing notes in compliance with the relevant laws and regulations of the state, and outstanding medium-term notes must not be worth more than 40% of the net assets of the corresponding enterprises.
 To issue short-term financing notes, enterprises must disclose the credit ratings of their main entities and the relevant facility ratings for the current note issuance.

Enterprises must issue medium-term notes in compliance with the relevant laws and regulations of the state, and outstanding medium-term notes must not be worth more than 40% of the net assets of the corresponding enterprises.
Enterprises must disclose the credit ratings of their main entities for the issuance of medium-term notes. Where any special clauses have been set out for medium-term notes, the enterprises concerned must also disclose the facility rating of the medium-term notes in question.

Enterprises can issue directional instruments to special institutional investors or specific institutional investors of debt financing instruments on the inter-bank bond market.

The issuance of short-term financing notes and medium-term notes by enterprises must be entrusted to qualified underwriting institutions.

Restrictions for offers to the public or professional investors

Corporate bonds. Corporate bonds that meet the following standards in credit status can be issued in a public manner to public investors or to qualified investors at the sole discretion of the issuer:

  • There has been no breach of contract or delay of payment of principal plus interest for debts by the issuer in the last three years.

  • The average annual distributable profits realised by the issuer in the last three accounting years is not less than 1.5 times the one-year interest of the bonds.

  • The credit rating of the bonds reaches "AAA".

  • Other conditions as prescribed by the China Securities Regulatory Commission (CSRC) according to the need for investor protection.

The public issuance of corporate bonds that fail to meet the standards prescribed above can only be made to qualified investors.

Non-public issued company bonds must be issued to qualified investors. Where non-public issued company bonds are issued, no advertising, public solicitation or any other covert mechanisms to issue them publicly can be used. The subjects of the issuance must not exceed 200 persons.

Financial bonds. Financial bonds can be issued publicly or towards particular investors on the inter-bank bond market. Financial bonds issued towards particular investors can only be transferred by the underwriters.

Debt financing instruments. Debt financing instruments can be publicly or specifically issued on the inter-bank bond market.

Enterprises can issue directional instruments to special institutional investors or specific institutional investors of debt financing instruments on the inter-bank bond market.

 

Market activity and deals

2. Outline the main market activity and deals in your jurisdiction in the past year.

Overall conditions

In 2015, the gross issuance on the bond market was hugely increased. It issued all kinds of bonds for CNY16.82 trillion in total, with year-on-year growth of 53.13% and increasing growth of 16.7%.

Bond issues included the following:

  • CNY10.12 trillion bonds issued by China Central Depository & Clearing Co Ltd (CCDC), which equals 60.16% of the gross bonds issued by the bond market.

  • CNY5.62 trillion bonds issued by Shanghai Clearing House, which equals 33.44% of the gross bonds issued by the bond market.

  • Bonds issued by the stock exchanges of CNY1.08 trillion, equal to 6.41% of the gross bonds issued by the bond market.

In respect of the inter-bank bond market:

  • CNY1.8 trillion treasury bonds were issued (with year-to-year growth of 25.43%).

  • CNY3.84 trillion local bonds were issued (almost ten times the issuance from the preceding year).

  • CNY2.58 trillion financial bonds were issued (with year-to-year growth of 12.37%).

  • Commercial banks issued debts of CNY0.2 trillion (with year-to-year growth of 140.89%).

Recent trends

China's State Council is in the process of transforming its functions, which is aimed at streamlining administration and delegating more power to lower-level government. Against this background, the securities markets also experienced some reform measures. Generally speaking, such measures:

  • Simplified the process of audit and enrolment.

  • Reduced administrative management.

  • Gave more discretion to companies.

  • Facilitated companies in direct debt financing.

In January 2015, China's Securities Regulatory Commission released revised measures for the administration of the issuance and transaction of corporate bonds. These measures have:

  • Expanded the scope of issuers.

  • Enriched the methods of bond issue.

  • Increased the places where bond trading can be conducted.

  • Simplified the audit procedures.

This reform of corporate bonds has promoted the rapid growth of corporate bonds issuance. Particularly since June 2015, the amount of issued corporate bonds has exceeded that of medium-term notes and short-term financing bonds and other similar enterprise financing tools.

In December 2015, the National Planning Commission released its "Opinions of Simplifying Audit Process, Strengthening Risk Prevention and Reforming the Regulatory Approach". This instrument is aimed at:

  • Simplifying the process of declaration for corporate bonds.

  • Improving audit efficiency.

  • Improving the efficiency of the use of bond funds.

  • Strengthening information disclosure and the responsibilities of intermediary organisations.

  • Emphasizing supervision both whilst the matters are being handled and after they have been handled.

This instrument reduced the corporate bonds audit process in the National Planning Commission, and is expected to further accelerate the issuance of corporate bonds.

In 2015, the People's Bank of China canceled the approval process of bonds trading on the inter-bank bond market. In February 2016, the National Association of Financial Market Institutional Investors released the revised "Rules for the Registration and Issuance of Debt Financing Instruments of Non-financial Enterprises (2016)", "Procedures for the Registration of the Public Offering of Debt Financing Instruments of Non-financial Enterprises (2016)", and the "Registration Documents Form System of the Public Offering of Debt Financing Instruments of Non-financial Enterprises (2016)". Generally speaking, these new regulations have:

  • Simplified the procedures for registration and issuance.

  • Reduced the report management of the National Association of Financial Market Institutional Investors.

  • Provided more discretion to companies.

  • Facilitated companies in direct debt financing.

  • Enabled debt financing instruments to play their role of supporting the development of the real economy more positively and fully.

Debt default

Whilst the debt market is developing rapidly, the frequency of credit events is also growing at the same time.

"11 Chao ri Debt" is recognised as the very first bond default event in China's publicly-raised bonds history. It broke the previous history of the rigid redemption of publicly-raised bonds. "ST Yunwang" "ST Tianwei" and "Zhuhai Zhongfu" all had their corporate bonds defaulted. "11 Tianwei MTN2" is recognised as the first state-owned enterprise default case.

There were 20 credit events on the debt market in 2015, and the protection of investors' interests is now of greater significance. As a result, more attention will be paid to the accuracy and consistency of credit rating institutions.

 

Structuring a debt securities issue

3. Are different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues)?

There are no different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues) for corporate bonds, enterprise bonds and debt financing instruments.

 
4. Are trust structures used for issues of debt securities in your jurisdiction? If not, what are the main ways of structuring issues of debt securities in the debt capital markets/exchanges?

No trust structures are used for issues of debt securities in our jurisdiction. The main ways of structuring issues of debt securities in the debt capital markets/exchanges is to use guarantees and other new methods.

 

Main debt capital markets/exchanges

5. What are the main debt securities markets/exchanges in your jurisdiction (including any exchange-regulated market or multi-lateral trading facility (MTF))?

Main debt markets/exchanges

China's debt market can be divided into the:

  • Floor Trading Market.

  • Over-the-counter (OTC) market.

The Floor Trading Market mainly refers to the exchange bond markets (including the Shanghai Stock Exchange and Shenzhen Stock Exchange) and the National Equities Exchange and Quotations (NEEQ). The OTC market mainly refers to the inter-bank bond market and the commercial bank bar bond markets. The inter-bank bond market plays a leading role in China's debt market.

Over-the-counter market: inter-bank bond market. The National Association of Financial Market Institutional Investors, founded on 3 September 2007, is a nationwide non-profit social organisation. Its competent authority is the People's Bank of China. Types of bond include, among others:

  • Short-term financing bills.

  • Mid-term notes.

  • Directional instruments.

  • Private placement notes (PPNs).

  • Ultra short-term financing bonds.

Floor Trading Market. The Shanghai Stock Exchange (SSE) was founded on 26 November 1990 and commenced operations on 19 December 1990. It is directly governed by the China Securities Regulatory Commission (CSRC). It has a Main Board, and bond types include:

  • Treasury bonds.

  • Local bonds.

  • Corporate bonds.

  • Financial bonds of policy banks.

The Shenzhen Stock Exchange (SZSE), established on 1 December 1990, is a self-regulated legal entity under the supervision of the CSRC. It also organises and supervises securities trading and performs the duties prescribed by the relevant laws, regulations, rules and policies. Its main functions include:

  • Providing the venue and facilities for securities trading.

  • Organising and supervising securities trading.

  • Other functions as approved by the CSRC.

The SZSE has put in place a multi-tiered capital market comprising the:

  • Main Board.

  • SME Board.

  • ChiNext market.

Bond type include:

  • Treasury bonds.

  • Government bonds.

  • Corporate bonds.

  • Enterprise bonds.

  • Privately-raised bonds.

The National Equities Exchange and Quotations (NEEQ) was founded on 20 September 2012. It is a national securities exchange place approved by the State Council. It is operated and managed by National Equities Exchange and Quotations Co Ltd, and governed by the China Securities Regulatory Commission. It deals with corporate bonds.

 
6. What legislation applies to the debt securities markets/exchanges in your jurisdiction? Who are the main regulators of the debt capital markets?

Regulatory bodies

Bonds are regulated according to their type, as follows:

  • Financial bonds issued by policy banks and special financial bonds are regulated by the People's Bank of China.

  • Financial bonds issued by commercial banks and non-banking financial institution bonds are regulated by the China Banking Regulatory Commission and the People's Bank of China.

  • Securities companies bonds and securities companies short-term financing bonds are regulated by the People's Bank of China and the China Securities Regulatory Commission.

  • Short-term financing bonds, mid-term notes and private placement notes are regulated by the National Association of Financial Market Institutional Investors.

  • Enterprise bonds are regulated by the National Development and Reform Commission, the People's Bank of China, and the China Securities Regulatory Commission.

  • Corporate bonds are regulated by the China Securities Regulatory Commission, the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

Legislative framework

The following legislation applies:

  • Corporate bonds:

    • Administrative Measures for the Issuance and Trading of Corporate Bonds;

    • Administrative Measures for the Filing Management of Privately Placed Corporate Bonds;

    • Rules of the Shanghai Stock Exchange on the Listing of Corporate Bonds;

    • Interim Administrative Measures of the Shanghai Stock Exchange for the Private Placement of Corporate Bonds;

    • Circular on Carrying out the Pilot Programme of Green Corporate Bonds;

    • Rules of the Shenzhen Stock Exchange on the Listing of Corporate Bonds;

    • Interim Administrative Measures of the Shenzhen Stock Exchange for the Private Placement of Corporate Bonds.

  • Enterprise bonds. Regulated by the Administrative Regulations on Enterprise Bonds.

  • Financial bonds:

    • Administrative Measures for the Issuance of Financial Bonds in the National Inter-bank Bond Market;

    • Operative Rules for Administrating the Issuance of Financial Securities of the National Inter-Bank Securities Markets.

  • Debt financing instruments:

    • Measures of the Administration of Debt Financing Instruments of Non-Financial Enterprises on the Inter-bank Bond Market Issued by the People's Bank of China;

    • Rules of the Registration and Issuance of the Debt Financing Instruments of Non-financial Enterprises;

    • Rules for the Non-Public Directional Issuance of Debt-Financing Instruments by Non-Financial Enterprises in the Inter-Bank Bond Market;

    • Chart System of the Registration Files of the Publicly Issued Debt Financing Instruments of Non-financial Enterprises;

    • Chart System of the Registration Files of the Non-public Target Offering Debt Financing Instruments;

    • Guide for the Prospect of the Debt Financing Instruments of Non-Financial Enterprises on the Inter-bank Bond Market.

 

Listing debt securities

7. What are the main listing requirements for bonds and notes issued under programmes?

Main requirements: Shanghai Stock Exchange

Public offering. Where there is an application for the listing of corporate bonds, it must meet the following requirements:

  • The public issuance of corporate bonds must be in conformity with the relevant provisions of the Securities Law.

  • It has been issued publicly according to the law with the approval of the relevant authorities.

  • It continues to meet the statutory conditions for issuing corporate bonds at the time of applying for listing.

  • The people who hold the corporate bonds must meet the requirements of the Administration of Appropriateness of Bond Market Investors of Shanghai Stock Exchange.

  • Such other circumstances as may be so prescribed in the listing rules of the Shanghai Stock Exchange.

Privately placed bonds. Where there is an application for the listing or transfer of these bonds, it must meet the following requirements:

  • Comply with the requirements under the Measures for Administration of Issuance and Trading of Corporate Bonds and other relevant laws and regulations.

  • Be privately placed according to the law.

  • Continue to meet the statutory conditions for privately placed bonds at the time of applying for the listing or transfer.

  • The people who hold the privately placed bonds must meet the requirements of the Administration of Appropriateness of Bond Market Investors of Shanghai Stock Exchange, and the total number of qualified investors must be no more than 200 people.

  • Such other circumstances as may be so prescribed in the listing rules of the Shanghai Stock Exchange.

Main requirements: Shenzhen Stock Exchange

Public offering. Where there is an application for the listing of corporate bonds, it must meet the following requirements:

  • The public issuance of corporate bonds must be in conformity with the relevant provisions of the Securities Law.

  • It has been issued publicly according to the law with the approval of the relevant authorities.

  • The people who hold the corporate bonds must meet the requirements of the Administration of Appropriateness of Bond Market Investors of Shenzhen Stock Exchange.

  • Such other circumstances as may be so prescribed in the listing rules of the Shenzhen Stock Exchange.

Privately placed bonds. The issuance and transfer of privately placed bonds is limited to qualified investors. The qualified investors who hold bonds in an issue must not be more than 200 people.

Minimum size requirements

Exchangeable bonds must not be lower than CNY5 billion. Other bonds should follow the clause as set out in the prospectus.

Trading record and accounts

The trading records and accounts must be managed by the trustee as named in the prospectus.

Minimum denomination

The face value of each corporate bond must be CNY100.

 
8. Are there different/additional listing requirements for other types of securities?

Listing of convertible corporate bonds

Where a listed company applies for its convertible corporate bonds to be listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, it must meet the following requirements:

  • The maturity of the convertible corporate bonds is not less than one year.

  • The actually issued amount of the convertible corporate bonds is not less than CYN50 million.

  • It continues to meet the statutory conditions for issuing convertible corporate bonds at the time of applying for listing.

Listing of exchangeable bonds

Where an issuer applies for its exchangeable bonds to be listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, it must the following requirements:

  • It has been issued publicly with the approval of the China Securities Regulatory Commission (CSRC)

  • The maturity of the exchangeable bonds is not less than one year.

  • The actually issued amount of the exchangeable bonds is not less than CYN50 million.

  • It continues to meet the statutory conditions for issuing exchangeable bonds at the time of applying for listing.

  • Such other circumstances as may be so prescribed in the listing rules of the relevant stock exchange.

Listing of stock

Where an issuer applies for its stock to be listed on Shanghai Stock Exchange or the Shenzhen Stock Exchange after an IPO, it must meet the following requirements:

  • It has been issued publicly with the approval of the CRSC.

  • The total share capital of the company is not less than CNY50 million.

  • Its publicly-offered shares amount to 25% or more of the total shares of the company.

  • Where the total share capital of the company exceeds CNY400 million, the percentage of the publicly-offered shares is 10% or more.

  • It has had no false entries in its financial and accounting documents for three years immediately preceding the application, and no other major illegal activities are attributable to it.

  • Such other circumstances as may be so prescribed in the listing rules of the relevant stock exchange.

 

Continuing obligations: debt securities

9. What are the main areas of continuing obligations applicable to companies with listed debt securities and the legislation that applies?

Corporate bonds

Under the Measures for Administration of Issuance and Trading of Corporate Bonds, the issuer of publicly-issued corporate bonds must disclose the interim reports and the annual reports audited by accounting firms which are qualified to engage in securities services during the life of the corporate bonds. The issuers of non-publicly issued corporate bonds must disclose information according to the time and content stipulated in the bond prospectus, and the relevant information disclosure documents must be submitted by the trustees to the Securities Association of China for filing.

Issuers must disclose information on the use of the raised funds from publicly-issued corporate bonds in the regular reports. In the case of non-publicly issued corporate bonds, the disclosure requirements concerning the use of the raised funds will be stipulated in the bond prospectus.

The issuer of publicly-issued corporate bonds must disclose, in a timely manner, any major matters that occur during the life of the bonds that may affect its debt repayment ability or the price of the bonds.

Enterprise bonds

Under the Notice of the General Office of the National Development and Reform Commission on Further Strengthening the Regulation Work for the Duration of Enterprise Bonds, in addition to the regular disclosure requirements, if any of the following events occur this must also be disclosed in a timely manner:

  • The business policies and business scope of the issuer changes significantly, or the external conditions of production and operation changes significantly.

  • The debt cannot be repaid when falling due.

  • The net asset loss exceeds 10%.

  • There is a decision made on:

    • the reduction of capital;

    • merger;

    • division;

    • dissolution; or

    • filing for bankruptcy.

  • Major litigation or arbitration matters are commenced.

  • A major administrative penalty is imposed.

  • An application for the issuance of new bonds is filed.

A bondholder meeting must be convened if any of the following events occur, and these events can only take effect after approval has been received by the statutory majority of votes of the bondholders:

  • The issuer intends to change the clauses stipulated in the bond prospectus.

  • The issuer intends to change the bond trustee.

  • There is any significant change to the guarantor or the collateral.

  • There is an event that significantly affects the interests of bondholders (such as making a decision on a reduction of capital, merger, division, dissolution or filing for bankruptcy).

The occurrence of any of the above events must also be announced in a timely manner.

Financial bonds

Under the Administrative Measures for the Issuance of Financial Bonds on the National Inter-bank Bond Market, issuers must report any major event affecting the fulfillment of its obligations to the People's Bank of China, in such a manner as prescribed by the People's Bank of China.

During the life of the financial bonds, the issuers must disclose the annual reports to investors prior to 30 April each year. The annual reports must include, among other things:

  • The explanations on the business operations of the previous year.

  • Financial reports audited by certified public accountants.

  • Major litigation events.

Where financial bonds are issued in the form of a guarantee, the issuers must disclose in the annual reports, among other things:

  • The explanations on the business operations of guarantors in the previous years.

  • Audited financial reports.

  • Any major lawsuits it is involved in.

The issuers must make public announcements on interest payment during the two business days prior to the date of each interest payment for the financial bonds, and make public announcements on redemption during the five business days prior to the date of final interest payment and redemption.

During the life of the financial bonds, the issuers must disclose reports on the bonds follow-up credit rating before 31 July of each year.

Where financial bonds are issued to target investors, the content and form of information disclosure will be stipulated in the prospectuses and issuance instructions, and the information will only be disclosed to subscribers.

Debt financing instruments

Under the Rules for the Disclosure of Information Pertaining to Debt Financing Instruments of Non-Financial Enterprises, with regard to the first tranche of debt financing instruments issued, the issuance documents must be published at least five working days before the issue date. With regard to subsequent issuance, the issuance documents must be published at least three working days before the issue date.

An enterprise must publish information such as the actual issuance scale, and the price and maturity of the current tranche of debt financing instruments, through the websites recognised by the Association of Institutional Investors no later than the working day following the date for the registration of creditors' rights and debts.

During the duration of the debt financing instruments, an enterprise must continue to disclose the following:

  • Disclose the annual report and the auditor's report for the preceding year before 30 April each year.

  • Disclose the balance sheet, the income statement and the cash flow statement of the first half of the current year before 31 August each year.

  • Disclose the balance sheets, the income statements and the cash flow statements of the first quarter and the third quarter of the current year before 30 April and 31 October each year.

An enterprise that is involved in any major event that may affect its debt paying ability during the duration of the debt financing instruments must disclose the occurrence of that event to the market in a timely manner.

An enterprise must establish the management system for information disclosure related affairs. An enterprise must also establish the procedures for the reporting, transmission, examination and disclosure of major events.

 
10. Do the continuing obligations apply to foreign companies with listed debt securities?

The continuing obligations also apply to foreign companies with listed debt securities.

 
11. What are the penalties for breaching the continuing obligations?

Regulatory measures

The following penalties can be applied for breaching the continuing obligations:

  • Order for corrections.

  • Regulatory discussions.

  • Issuance of warnings.

  • Order to make public statements.

  • Order to participate in training.

  • Order to make regular reports.

  • Determination of incompetency.

  • Suspension of the acceptance of documents relating to administrative licensing.

Administrative punishment

Where an issuer, a listed company or any other entity that is obliged to disclose information fails to disclose information according to the relevant regulations, or makes false entries, misleading statements or major omissions in the information disclosed, it will be:

  • Ordered to rectify the error.

  • Given a warning.

  • Fined not less than CNY300,000 but not more than CNY600,000.

The person directly in charge, and the other persons directly responsible, will be given a warning and will, in addition, be fined not less than CNY30,000 but not more than CNY300,000 each.

Where an issuer, a listed company or any other entity that is obliged to disclose information fails to submit the relevant reports in accordance with the relevant regulations, or there are false entries, misleading statements or major omissions in the reports submitted, it will be:

  • Ordered to rectify the error.

  • Given a warning.

  • Fined not less than CNY300,000 but not more than CYN600,000.

The person directly in charge, and the other persons directly responsible, will be given a warning and will, in addition, be fined not less than CNY30,000 but not more than CNY300,000 each.

Damages

An entity is held liable for civil compensation and is required to pay an administrative fine or penalty. However, where the enforceable property is not sufficient to satisfy both simultaneously, it will bear the civil compensation before the administrative penalty.

Criminal responsibility

If the breach of the continuing obligations constitutes a crime, criminal responsibility will be investigated according to the relevant criminal law.

 

Advisers and documents: debt securities issue

12. Outline the role of advisers used and main documents produced when issuing and listing debt securities.

Corporate bonds

The following are the main advisers:

  • The lead underwriter: responsible for the prospectus, the due diligence report (for public issuance) and the registration form (for private placement).

  • The legal adviser for the issuer: responsible for the legal opinions.

  • The accountant: responsible for the financial report and audit report of the last three years, and the recent financial report or accounting statement (for public issuance), and the financial reports of the last two financial years audited by accounting firms qualified to engage in securities services (for private placement).

  • The credit rating agency: responsible for the credit rating reports (in the case of private placement, it is required only when this is so provided by the prospectus).

Enterprise bonds

The following are the main advisers:

  • The lead underwriter: responsible for the prospectus.

  • The legal adviser for the issuer: responsible for the legal opinions.

  • The accountant: responsible for the financial report and the audit report of the last three years.

  • The credit rating agency: responsible for the credit rating reports.

Financial bonds

The following are the main advisers for a financial institution:

  • The lead underwriter: responsible for the application report, articles of issuance (for private placement), prospectus (for public issuance), special reports of the issuers concerning the debt paying plans for the current bonds and safeguard measures, and the due diligence report (in the case where the issuance of bonds is underwritten in the form of an agreement).

  • The legal adviser for the issuer: responsible for the legal opinions.

  • The accountant: responsible for the financial report and the audit report of the last three years.

  • The credit rating agency: responsible for the credit rating reports and the statement of the schedule of tracking rating.

The following are the main advisers for a policy bank:

  • The lead underwriter: responsible for the application report, and the due diligence report (in the case where the issuance of bonds is underwritten in the form of an agreement).

  • The accountant: responsible for the financial report and the audit report of the last three years.

Debt financing instruments

The following are the main advisers:

  • The lead underwriter: responsible for the registration report, sponsor letter, prospectus (for public issuance), agreement (for private placement), and the letter of confirmation from investors (for private placement).

  • The legal adviser for the issuer: responsible for the legal opinions.

  • The accountant: responsible for the financial report, the audit report of the last three years and the recent accounting statement (for public issuance).

  • The credit rating agency: responsible for the credit rating reports.

 

Debt prospectus/main offering document

13. When is a prospectus (or other main offering document) required? What are the main publication/delivery requirements?

A prospectus or private placement agreement is usually required at the time of registration. The requirements for application documents for a follow-up issuance may be reduced.

 
14. Are there any exemptions from the requirements for publication/delivery of a prospectus (or other main offering document)?

There are no standard exemptions from the application requirements.

However, the application requirements for a public issuance are different from those for a private placement. The application documents for a private placement are less onerous than those for a public issuance.

 
15. What are the main content/disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

Any information that is critical for an investor to make an investment decision must be disclosed in the prospectus.

Corporate bonds

Under the Standards No 23 for the Contents and Formats of Information Disclosure of Companies that Issue Securities to the Public – Prospectus for the Public Issuance of Corporate Bonds, the following requirements must be met in the preparation of the prospectus:

  • Language used must be factual, descriptive and easy to understand. The inclusion of any blessing, advertisement, compliments or slander is prohibited. Charts, forms and other intuitive forms of presenting information are encouraged.

  • The source must be provided when data is cited. Facts and evidence used must be sufficient and objective.

  • Arabic numbers must be used when any figure is cited. The currency is Renminbi (RMB) unless otherwise specified, with yuan, 1,000 yuan or 10,000 yuan as the unit.

  • The issuer can prepare the specification in foreign languages on the basis of consistency with the Chinese text. In the event of any inconsistency between the two versions, the Chinese text will prevail.

The main contents of the prospectus are as follows:

  • Cover, spine, title page and catalogue.

  • Terms of the issuance.

  • Summary of the issuance.

  • Risks.

  • Credit status of the issuer and the bonds.

  • Credit advancement mechanism.

  • Repayment plan and other safeguard measures.

  • Basic information on the issuer.

  • Financial information of the issuer.

  • Proposed usage of funds.

  • Details of bondholders' meetings.

  • Basic information on the trustee.

  • Statement of issuers.

  • Details on any agency and relevant persons.

  • Reference documents.

Enterprise bonds

Under the Guide for Information Disclosure of Enterprise Bonds Issuance, the prospectus must include, among other things, a cover, title page, catalogue and terms of the issuance.

The main contents of the prospectus are as follows:

  • Foundation of the issuance.

  • Institutions relevant to the issuance.

  • Summary.

  • Subscription and trust.

  • Booth for the issuance.

  • Undertake of subscribers.

  • Method of repayment.

  • Basic information on the issuer.

  • Business of the issuer.

  • Financial condition of the issuer.

  • Outstanding bonds.

  • Proposed usage of funds.

  • Safeguards for repayment.

  • Risks.

  • Credit status of the issuer.

  • Legal opinion.

  • Reference documents.

Debt financing instruments

Under the Guide for Prospectus of Debt Financing Instruments of Non-Financial Enterprises in the Inter-bank Bond Market, the following requirements must be fulfilled in the preparation of the prospectus:

  • Cited information must include references to time and must be complete, objective and fair.

  • Arabic numbers must be used when any figure is cited. The currency is Renminbi (RMB) unless otherwise specified.

  • Contents must be accurate and unambiguous. The inclusion of any blessing, advertisement or compliments is prohibited.

  • Prospectus must be presented on A4 size paper.

The main contents of the prospectus are as follows:

  • Cover, title page, and catalogue.

  • Terms of the issuance.

  • Risks.

  • Provisions of the issuance.

  • Proposed usage of funds.

  • Basic information on the issuer.

  • Financial information of the issuer.

  • Credit status of the issuer.

  • Guarantees.

  • Taxation.

  • Relevant institutions involved.

  • Appendix.

 
16. Who is responsible for the prospectus (or other main offering document) and/or who is liable for its contents?

Responsibility

The following are responsible for the prospectus:

  • Issuer.

  • Directors, supervisors, and senior managers of the issuer. All directors, supervisors, and senior managers must guarantee that there are no false entries, misleading statements or material omissions in the prospectus and the summary, and assume legal liability for the truthfulness, accuracy and completeness of the prospectus and the summary.

  • Lead underwriter must check the prospectus and the summary and confirm that there are no false entries, misleading statements or material omissions. The lead underwriter must assume legal liability for the truthfulness, accuracy and completeness of the prospectus and the summary.

  • Legal advisers must check the prospectus and the summary and confirm that there is no inconsistency between the prospectus (including the summary) and the legal opinion. Legal advisers must further agree with the legal opinion cited in the prospectus and the summary, and ensure that the legal opinion cited does not include any false entries, misleading statements or material omissions. Legal advisers must assume legal liability for the truthfulness, accuracy and completeness of the legal opinion cited in the prospectus and the summary.

  • Accounting firm and accountants must check the prospectus and the summary and confirm that there is no inconsistency between the prospectus (including the summary) and the financial reports. Accounting firm and accountants must further agree with the financial reports cited in the prospectus and the summary, and ensure that the financial reports cited do not include any false entries, misleading statements or material omissions. Accounting firm and accountants must assume legal liability for the truthfulness, accuracy and completeness of the financial reports cited in the prospectus and the summary.

  • Rating institution and credit analysts must check the prospectus and the summary and confirm that there is no inconsistency between the prospectus (including the summary) and the rating reports. Rating institution and credit analysts must further agree with the rating reports cited in the prospectus and the summary and ensure that the financial reports cited do not include any false entries, misleading statements or material omissions. Rating institution and credit analysts must assume legal liability for the truthfulness, accuracy and completeness of the rating reports cited in the prospectus and the summary.

Legal liability

Regulatory measures. The following regulatory measures can be applied where the requirements for the prospectus contents are not met:

  • Order for corrections.

  • Regulatory discussions.

  • Issuance of warnings.

  • Order to make public statements.

  • Order to participate in training.

  • Order to make regular reports.

  • Determination of incompetency.

  • Suspension of the acceptance of documents relating to administrative licensing.

Administrative punishments. Where an issuer, a listed company or any other entity that is obliged to disclose information fails to disclose information according to the relevant regulations, or makes false entries, misleading statements or major omissions in the information disclosed, it will be:

  • Ordered to rectify the error.

  • Given a warning.

  • Fined not less than CNY300,000 but not more than CNY600,000.

The person directly in charge, and the other persons directly responsible, will be given a warning and will, in addition, be fined not less than CNY30,000 but not more than CNY300,000 each.

Where an issuer, a listed company or any other entity that is obliged to disclose information fails to submit the relevant reports in accordance with the relevant regulations, or there are false entries, misleading statements or major omissions in the reports submitted, it will be:

  • Ordered to rectify the error.

  • Given a warning.

  • Fined not less than CNY300,000 but not more than CYN600,000.

The person directly in charge, and the other persons directly responsible, will be given a warning and will, in addition, be fined not less than CNY30,000 but not more than CNY300,000 each.

Damages. An entity can be held liable for civil compensation where it fails to meet the requirements for the prospectus contents, and is required to pay an administrative fine or penalty. However, where the enforceable property is not sufficient to satisfy both simultaneously, it will bear the civil compensation before the administrative penalty.

Criminal responsibility. If the requirements for the prospectus contents are not met and this constitutes a crime, criminal responsibility will be investigated according to the relevant criminal law.

 

Timetable: debt securities issue

17. What is a typical timetable for issuing and listing debt securities?

Corporate bonds

Upon acceptance of the application documents, the China Securities Regulatory Commission (CSRC) will review an application for the public issuance of corporate bonds in accordance with the law, and provide its decision on approval or disapproval of the application within three months from the date of receiving the application and issuance documents. The issuer must complete the first issuance of corporate bonds within 12 months as of the date of the CSRC's approval, and the issuance of the remaining corporate bonds must be completed within 24 months.

For an issuance of corporate bonds in a non-public manner, the underwriting institution, or the issuer that sells the bonds, will file the appropriate documents with the Securities Association of China within five working days of the completion of each issuance.

Enterprise bonds

Local enterprises must submit the enterprise bonds declaration materials directly to provincial development and reform departments. The provincial development and reform departments will transfer those materials to the National Development and Reform Commission (NDRC) within five working days of receipt. The review and approval procedure will be completed within 30 working days (or within 60 working days in complicated circumstances) from the date the bonds declaration materials are received by the NDRC (during this time, the third-party appraisal will be completed within 15 working days).

Debt financing instruments

The Registry will complete its formal examination within one business day after receipt of the registration documents. The Registry's preliminary review (including any supplemental submissions made by the enterprise or any relevant institutions) will not exceed 20 business days, and the entire process for the preliminary review is completed within 35 business days.

Once the preliminary review has been successfully passed, the registration documents will be submitted to the registration meeting. The registration meeting is held, in principle, once a week. The registration is accepted on the condition that it will be reviewed again within 17 business days (including any further supplemental submissions made by the enterprise or any relevant institutions).

 

Tax: debt securities issue

18. What are the main tax issues when issuing and listing debt securities?

Business tax

The Notice on Certain Tax Exemption Policies on Purchase and Sale of Individual Financial Products provides that the incomes of individuals (including sole proprietors and other individuals) realised from engagement in a foreign exchange, securities, non-goods futures and the purchase and sale of other financial products will be temporarily exempt from business tax.

Article 18 of the Detailed Rules for the Implementation of the Business Tax Interim Regulations defines the activities that are temporarily exempt as: "the business of buying and selling foreign currencies, negotiable securities, non-goods futures and other financial instruments in which a taxpayer is engaged".

The Announcement of the State Administration of Taxation on Issues Concerning Business Tax on Bond Trading (Announcement 2014 No 50 of the State Administration of Taxation) provides that the turnover of a financial enterprise from trading bonds will be the balance after the deduction of the purchase price of the bonds from the selling price of the bonds. Specifically, the purchase price of a bond will be the balance after the deduction of the proceeds gained during the bond-holding period from the subscription price of the bond.

Income tax

The Notice of the State Administration of Taxation on Strengthening the Withholding and Paying of Individual Income Tax on Interests of Corporate Bonds provides that individual income tax on interests of corporate bonds must be withheld by cashing agencies and paid directly to the treasury at the time of cashing interests for the holders of the bonds. Cashing agencies must withhold individual income tax under the individual income tax laws.

The Notice of the Ministry of Finance and the State Administration of Taxation on Exempting Income Tax on the Interest Accrued on Local Government Bonds provides that enterprises and individuals will be exempt from enterprise income tax and individual income tax, respectively, on the interest accrued on their holdings of local government bonds issued in 2012 and subsequent years. Local government bonds refers to bonds that, upon approval by the State Council, are issued and repaid by the governments of all provinces, autonomous regions, municipalities directly under the Central Government and cities separately designated in the state plan.

The Announcement of the State Administration of Taxation on Issues Concerning Tax Treatment of Income from Enterprises' Treasury Investments provides that the interest income from treasuries will be exempt from enterprise income tax. A treasury transfer of an enterprise will be regarded as a transfer of assets, and the income (loss) incurred as a result will be subject to taxation as part of the taxable income of the enterprise.

 

Clearing and settlement of debt securities

19. How are debt securities cleared and settled and what currency are debt securities typically issued in? Are there special considerations for holding, clearing and settling debt securities issued in foreign currencies?

The China Central Depository & Clearing Co Ltd. (CCDC), as the central debt securities depository, provides a centralised depository for bonds in China and various clearing arrangements for different participants in the bond market.

The inter-bank bond market is a wholesale market. Deals are reached by negotiation and are typically cleared one-by-one. The CCDC opens security accounts for investors and serves as the primary bond trustee. The CCDC also conducts clearing for the market.

The exchange market is a retail market cleared by centralised matching. The typical way of clearing is by using a netting settlement. The market implements a two-tier custody system. The CCDC is designated as the primary bond trustee and opens master accounts for the exchanges. The China Securities Depository and Clearing Corporation Limited (CSDC) is the secondary bond trustee and records investors' accounts. The CCDC does not interact with investors directly. The CSDC accounts for the clearing of the exchanges.

The commercial bank over-the-counter market is a derivative of the inter-bank bond market and also a retail market. The market implements a two-tier custody system. The CCDC is designated as the primary bond trustee and opens proprietary accounts and master accounts for the banks. The banks are the secondary bond trustee. The CCDC does not interact with investors directly. The banks make a daily transmission of the balance data to the CCDC, and the CCDC provides a balance inquiry service to the investors.

The bond market in China uses Renminbi for clearing and settlement. Foreign exchange regulations and loss must be considered when using foreign currency for clearing and settlement.

 

Reform

20. Are there any proposals for reform of debt capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

During the National People's Congress and the Chinese People's Political Consultative Conference in the year of 2016, Jia Kang, a member of the Chinese People's Political Consultative Conference, proposed the following three motions related to the bond market:

  • Suggestions on Allowing Commercial Banks Participate in Treasury Bond Futures Trade.

  • Suggestions on the Two-year Treasury Bond Futures.

  • Suggestions on Levy Tax on Income from Treasury Bond Interest.

Zuo Dingchao proposed a motion on Developing Measures of Increased Bond Allocation.

 

Online resources

China Foreign Exchange Trade System (CFETS)

W www.chinamoney.com.cn/en/index.html

Description. A website maintained and updated by the China Foreign Exchange Trade System, which provides systems for FX trading, RMB lending, bond trading, and exchange rate and interest rate derivatives trading. It provides clearing, information, risk management, and surveillance services on interbank markets, and engages in other businesses authorised by the People's Bank of China.

ChinaBond

W www.chinabond.com.cn/

Description. A website maintained and updated by the China Securities Depository and Clearing Corporation Limited (CSDC), providing information about securities registration, clearing and settlement.



Contributor profile

Kejun Guo, Partner

Zhong Lun Law Firm

T +86 10 5957 2082
F +86 6568 1838
E guokejun@zhonglun.com
W www.zhonglun.com/cn/index.aspx

Professional qualifications. PRC and New York, Lawyer

Areas of practice. M&A; capital markets; private equity

Non-professional qualifications. Master of Law, Peking University; Bachelor of Economy, Renmin University; LLM degree, US (full scholarship sponsored by Sohman Scholarship).

Recent transactions

Mr Guo has a high level of proficiency in English and an in-depth knowledge of the laws on corporates and on securities. He has handled a number of large M&A, reorganisation and financing projects. His clients are mostly heavyweight firms operating in a wide range of industry sectors, including energy, medicine, petrochemistry, securities, fund, automobile, and insurance.

Professional associations/memberships.

  • Independent director for two listed companies.
  • Adjunct professor of Renmin University.
  • Standing Council of China Venture Capital & Private Equity Association.
  • Council of Zhong Lun Charity Foundation.

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