In 2020 when the new Securities Law was enforced, the registration-based corporate bond issuance system reform was officially launched and steadily advanced. It’s an important milestone in the reform and development course of the exchange-traded bond market. SZSE has conscientiously put in place the requirements of higher-level laws, optimized the basic systems of the bond market, and enriched and innovated in product series. While energizing market entities, SZSE has striven to improve the capability and efficiency to serve the real economy. In 2020, the issue volume of SZSE-listed bonds and asset-backed securities increased by 36% year on year. The proportion of the issue volume of corporate bonds by AAA issuers rose from 51% to 64%, and the issue volume of innovative bond types such as green bonds, innovation & entrepreneurship corporate bonds, renewable bonds, anti-pandemic bonds, house leasing bonds, etc. recorded nearly CNY 226.7 billion. The market structure continued to improve and the innovation capability was further enhanced, actively promoting the high-quality development of the bond market.
The 2020 annual report is the first annual report disclosed by bond issuers in accordance with the new Securities Law. As at 30 April 2021, a total of 630 bond issuers and 436 asset-backed special programs on the SZSE market disclosed their 2020 annual reports, more than those in the same period of the previous year. Overall, facing the unexpected pandemic and the complex and ever-changing external situation, SZSE-listed issuers resumed work and production in an orderly manner. They showed good recovery, with performance gradually improving. SZSE earnestly fulfilled frontline regulatory duties, with the review of annual reports as the lever and problems and risks as the orientation. On the one hand, SZSE especially extracted important risk clues found in the review of annual reports. Centering on the four main lines of information disclosure, financial accounting, fund raising and corporate governance, SZSE made a painstaking investigation and screened and predicted the overall risks of annual report disclosing parties in solvency and pooling of cash flows of underlying assets. On the other hand, regarding the violations of laws and regulations found in the oversight of annual reports, SZSE adopted the “zero tolerance” principle in handling, strengthening the foundation for the high-quality development of the bond market. SZSE recently sent a notice of criticism and disciplinary punishment to four bond issuers and relevant principals.
Adopting various measures simultaneously to improve the information disclosure quality of annual reports
To ensure a good job in disclosure of annual reports in 2020, SZSE made early, meticulous arrangements. Through a series of measures including issuing a notice for disclosure of annual reports, holding regular micro-class training, announcing the focuses of review of annual reports and refining the information disclosure reporting system, SZSE helped improve market entities’ management level of information disclosure business.
According to the review results of 2020 annual reports, the information disclosure quality of issuers or managers of special programs improved from the previous year on the whole. Annual reports were prepared basically according to the criteria of annual reports or format guide. The disclosed content was more adequate, risk warning clearer, and analysis of operations more comprehensive. The annual reports were more readable and useful. Problems that were seen in previous annual reports reduced substantially, such as inadequate risk warning, disclosure of important matters in periodical reports instead of temporary announcements, failure to disclose difference in market ratings of the same entity, incomplete financial analysis or disclosure for the sake of formality, insufficient disclosure of special articles on innovative products, etc.
SZSE found in the review that most issuers set up a special account for raised funds, used raised funds for specified purposes or changed their purposes of use according to relevant procedures and corporate governance and internal control regulations. On the whole, issuers did well in standard operation. Based on the information disclosed in the annual reports, SZSE will learn more about issuers’ actual use of raised funds, corporate governance, standard operation, etc. through the annual report of entrusted management matters, field inspection, etc. SZSE will focus on whether raised funds are on-lent or embezzled and whether approval procedures are implemented and information disclosure obligations are fulfilled in in-house lending of large-sum funds, pledge/mortgage of assets and external guarantee. If any violation of laws and regulations is found, SZSE will promptly adopt regulatory measures.
Forward-looking regulation was enhanced based on bond characteristics
In 2020, most SZSE-traded bond issuers were deeply engaged in their main business. Their asset scale and profitability continued to grow, and debt level was stable on the whole. As at 31 December 2020, SZSE bond issuers’ total assets increased by 10% from the prior year-end, and average debt-to-assets ratio was 61%, indicating that the asset-debt structure was at a reasonable level. In 2020, SZSE bond issuers saw a year-on-year growth of over 8% in both the average operating income and the net profit attributable to owners of parent companies. Over sixty percent of issuers recorded a positive growth in income and over fifty percent witnessed a positive growth in net profit. Average net cash inflow from operating activities was basically the same as that in the previous year, average net cash inflow from fund raising activities increased significantly by 74% compared to the same period of the previous year.
In this year’s review work of annual reports, SZSE defined priorities and targeted certain subjects based on regulatory practices and credit risk characteristics. SZSE focused more on entities’ solvency and cash flows of underlying assets and adopted classified regulation and targeted measures according to overall solvency risk characteristics, thus enhancing forward-looking regulation.
First, SZSE paid attention to the impact of matters involved in non-standard audit opinions on solvency. Among the disclosed 2020 annual reports for bonds, 25 issuers were provided with a non-standard unqualified audit report. According to those non-standard unqualified audit reports, the foregoing issuers were given non-standard audit opinions because of heavy losses, overdue debts, pending actions, recovery of receivables, insufficient audit evidence for provision for impairment of assets or asset acquisition, restricted audit scope, etc. Based on the nature of problems reflected in the audit reports and their scope of influence, SZSE immediately started risk screening, learned through letters of inquiry more about the impact on issuers’ sustainable operation ability and solvency, and implemented classified regulation of risks.
Second, SZSE paid attention to the reasonableness of debt size, structure and maturity and their changes. Based on experiences in day-to-day regulation, SZSE required companies who had debt leverage higher than that of the industry, faster debt growth and greater pressure to repay the debts in the short term or companies who had a small asset size, a debt-to-assets ratio higher than the reasonable level and poor solvency to describe year-on-year changes, types and maturity structure of all interest-bearing liabilities, reasons for debt growth and whether there are overdue debts. In the meantime, SZSE strengthened monitoring and risk judgment of overall debt financing of companies with a large size of bonds, companies with weak qualifications and real estate companies.
Third, SZSE paid attention to the debt repayment risk of issuers whose outstanding deposits and loans both remained at a high level, issuers whose profit relied heavily on non-recurring profits and losses, and issuers who had a weak parent company but strong subsidiaries. Regarding issuers whose deposits and loans both remained at a high level, SZSE required them to state the authenticity of monetary capital and whether there are defects of right, to prevent involvement in watered capital or concealment of fund restrictions. As to issuers whose funds were under centralized management of the group’s finance company, SZSE required them to describe the specific arrangements for collection and use of funds, capability to dispose of funds at their own discretion and whether there are restrictions on the scope of use. For issuers whose profitability from core business continued to decline or whose profit relied heavily on non-recurring profits and losses such as assets disposal, changes in fair value or government subsidies, SZSE required them to present countermeasures against decline in profitability from main business, and elaborate on stability and sustainability of non-recurring profits and losses and their impact on solvency. Regarding controlled companies who had a weak parent company but strong subsidiaries, SZSE required them to show the continuity and changes in the subsidiaries’ cash dividends, the parent company’s profitability in other business and its share pledge ratio in core subsidiaries.
Fourth, SZSE paid attention to such acts as failure to comply with corporate governance standards, failure to fulfill commitments or involvement in escaping and revoking debts. Regarding issuers who frequently lent large-sum money to their controlling shareholders or related parties or provided guarantee for their financing or who had disputes or lawsuits among their shareholders or with subsidiaries, SZSE required them to fully describe whether they violated any provision in their prospectuses, the recoverability of lent money and its impact on issuers’ solvency. Regarding commitments specified in the prospectus that may affect solvency including no additional lending of non-operating funds and limit on the leverage ratio, SZSE focused on the fulfillment of such commitments and strengthened investor protection. Regarding pledge and mortgage of large-sum assets, external investments, equity or asset transfer, etc. SZSE paid attention to whether there’s violation of information disclosure regulations, malicious asset transfer to escape or revoke debts, etc.
Fifth, SZSE paid attention to the impact of the pandemic on the cash flow of some underlying assets. Affected by the pandemic, the cash flows of some future operating income and immovable property asset securitization products such as expressway tolls, entrance tickets for scenic spots and hotels decreased to some extent in 2020. And that may affect the regular profit distribution of the special plans. SZSE required managers of the special plans to fully disclose the cash flow of underlying assets and the operation status of specific original rights holders. In the meantime, SZSE paid close attention to the difference between the actual and forecast cash flows of underlying assets during the reporting period, focused on whether cash flow was pooled on time and in full according to the provisions specified in the special plans, and screened and addressed latent risks of the plans.
Strengthening the fundamental goal and risk control to provide a solid foundation for high-quality development
Since 2020, SZSE has adhered to the fundamental goal of serving the real economy and upheld the principle of attaching equal importance to market development and risk control. SZSE has refined the institutional foundation, optimized the market structure and strengthened the bottom line of risk control, laying a solid foundation for the high-quality development of the exchange’s bond market.
First, SZSE has comprehensively refined basic systems and advanced the registration-based issuance system reform in depth. Since the implementation of the registration-based corporate bond issuance system, SZSE has actively promoted the development of supporting rules for the new Securities Law. Through the establishment of a system of bond rules with review rules and listing rules as its core, review business guidelines and duration information disclosure and risk management guidelines as its trunk and business handling guides as its supplements that covers the whole regulatory chain, SZSE has strengthened the institutional foundation for advancing the registration-based bond issuance system reform in depth.
Second, SZSE has made early arrangements, adopted targeted measures, and improved the whole-chain risk control system. SZSE has focused on key areas and improved weaknesses, built an “ex ante, in-process and ex post” risk control system for fixed-income products, implemented strict review policy on financing, and strengthened access of issuers with weak qualifications. On the duration regulation side, SZSE has, following the principles of “classified regulation and targeted measures”, conducted risk monitoring and screening by linking work at selected spots with that in entire areas. Meanwhile, SZSE intensified investigation and punishment of violations of laws and regulations and cracked down on financial fraud, malicious debt evasion and revocation, etc. On the risk treatment side, SZSE has responded quickly, strengthened synergy in regulation, and guided partial companies to relieve debt pressure and defuse bond risks using market-based bond management instruments such as bond put-back revocation and resell and bond swap.
Third, SZSE has enriched and made innovations in product supply and leveraged the role of bond financing in serving the real economy. SZSE has earnestly carried out the innovation-driven development strategy, accelerating innovation in bond products in various fields concerning economic and social development such as technology R&D, green development and opening up. Recently, SZSE successfully issued Technological Innovation Bonds, Carbon Neutrality Bonds, etc. to support innovation in core technologies in key fields and the construction of green, low-carbon and emission reduction projects. So far, more than CNY 437.1 billion innovative bond products that serve national strategies such as innovation & entrepreneurship corporate bonds and green bonds have been issued on SZSE.
Fourth, SZSE has improved the trading mechanism of the bond market and continuously energized market entities. SZSE has attached great importance to and continuously promoted the building of the bond market system that is featured by complete infrastructure, efficient market operation, excellent price discovery mechanism and efficient regulatory risk control. Based on market demand and the characteristics of bond products, SZSE has launched the reconstruction, optimization and adjustment work of the bond transaction settlement mechanism, transaction organization method and trading system, to improve bond liquidity and market stability.
Next, SZSE will earnestly practice the principles of “system building, non-intervention, and zero tolerance” and the requirements of standing in awe of the market, rule of law, professionalism and risks and pooling the efforts of all sides to develop the capital market. Adhering to the working philosophy of being open-minded, transparent, honest and impartial, we will strengthen the institutional foundation, improve regulatory efficiency, optimize the market structure, and give play to the role of the capital market as a hub, to steadily advance the high-quality development of the bond market. First, we will stick to our positioning and support the financing and development of quality enterprises. We will continue to adjust structure, refine incremental business and stabilize existing business. We will refine market mechanisms, deepen innovation in bond products, and do a better job in serving the real economy. Second, we will punish violations of laws and regulations severely to maintain market discipline and order. We will crack down on gross violations of laws and regulations and acts that damage the market credit basis such as financial fraud, fraudulent stock issuance and malicious debt evasion and revocation, to ensure healthy and stable development of the bond market. Third, we will strictly guard against risks and improve working mechanisms along the regulatory chain. We will guard the pass well, strengthen coordination and synergy between the review side and the regulation side, and enhance duration risk monitoring and screening; continue to refine the joint working mechanism for control of bond risks, urge relevant entities to fulfill their duties, leverage the concerted efforts in regulation, and forestall and defuse risks in a timely fashion. Fourth, we will optimize services to enhance market participants’ sense of gain. We will continue to simplify handling procedures and improve service quality in such links as financing review, issuance and listing, continuous regulation and risk treatment, to let the registration-based IPO system reform benefit all market participants, thus enhancing their sense of gain from the reform.