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On January 12, 2021, the Shanghai Stock Exchange (SSE) issued a disciplinary decision to publicly condemn Brilliance Auto Group Holdings Co., Ltd. (the “Brilliance Group” for short), and the chairman and the person in charge of information disclosure at the company. The decision has been made after verifying the facts of Brilliance Group's major violations, and it is also a necessary move to tighten the discipline in the market. Although Brilliance Group’s violations are a separate case, with high degree of attention and adverse impact on the market, the case has dampened the confidence of the investors and the market to a certain extent, and affected the healthy and orderly development of the bond market. Therefore, such cases should be dealt with in a timely manner in accordance with laws and rules. At present, the credit status of bond issuers on the SSE market is generally sound, and the overall risk in the bond market is stable and controllable. Going forward, the SSE will implement the arrangements of the China Securities Regulatory Commission (CSRC), adhere to the fundamental goal of the capital market serving the real economy, well balance the relationship between promoting development and preventing risks, enhance the rule of law in the bond market, continue to improve the mechanism for risk prevention and control, optimize the structure of products in the bond market, and steadily propel the high-quality development of the bond market.
1. The Brilliance Group should be held responsible for the clear facts of violation in accordance with rules.
Earlier, the incident of Brilliance Group’s default on its corporate bond caused widespread market concern. After kicking off the rapid response mechanism promptly, the SSE adopted a number of measures to deal with the risk, and simultaneously checked the suspected violations of Brilliance Group. It was verified that Brilliance Group violated the rules mainly in four areas: first, it failed to disclose in a timely manner the major events affecting its solvency and the bond price, such as inability to pay off matured debts on time, major lawsuits and the circumstances where its assets were judicially frozen and its important subsidiary’ equity was transferred; second, in the case of major changes in the solvency and significant uncertainties in the repayment of bond principal and interest, Brilliance Group failed to comply with its promises in the prospectus, and transferred and pledged assets without the consent of the trustee; third, Brilliance Group failed to work with the trustee to carry out risk screening and credit risk management, and at the critical junctures of bond redemption, repeatedly rejected the trustee’s requests for on-site interview and refused to provide fund proofs; and fourth, in the case of major changes in solvency, Brilliance Group neither formulated the plan for risk mitigation and response nor provided any messages about the redemption risks and the progress in dealing with the risks in a timely manner.
The aforementioned violations of Brilliance Group should be dealt with seriously, as they were in breach of the relevant provisions in the Rules of Shanghai Stock Exchange for Listing of Corporate Bonds, the Rules of Shanghai Stock Exchange for Listing and Transfer of Non-publicly Offered Corporate Bonds and the Guidelines of Shanghai Stock Exchange for Credit Risk Management of Corporate Bonds in Duration (for Trial Implementation) as well as the company’s public commitments made in the corporate bond prospectus, and harmed the interests of bondholders. After discussions by the SSE Disciplinary Action Committee, it has been decided to publicly condemn Brilliance Group and the relevant persons responsible.
It should be stressed that honesty and trustworthiness are the foundation for the healthy development of the bond market, and corporate bond issuers should regard integrity and compliance as the fundamental criteria for the company’s financing and development. The SSE will resolutely implement the guideline of “building the system, non-intervention, and zero tolerance”, enhance the rule of law in the bond market, severely crack down on financial frauds, malicious debt evasion and other serious acts violating laws and rules and dampening confidence in the market, and effectively maintain the healthy ecosystem of the bond market.
2. The SSE will improve the mechanism for whole-chain risk prevention and control, and consolidate the credit foundation of the SSE bond market.
Preventing and controlling risks provides a fundamental guarantee for advancing the high-quality development of the bond market. The SSE has always taken risk prevention and control as the top priority for market development. In recent years, the SSE has released sets of self-discipline rules, and improved the system of normalized credit risk prevention and control that focuses on issuers and trustees, features the joint participation of investors, lead underwriters, rating agencies and other intermediaries, and covers the whole process including risk monitoring, screening, categorization, early warning, settlement and handling; in addition, relying on the "five-in-one" supervision coordination mechanism of the CSRC system, the SSE has pooled the synergy to maintain the stable operation of the SSE bond market.
Going forward, the SSE will energetically improve the whole-chain and multi-link mechanism for bond credit risk prevention and control, integrate risk prevention and control into all aspects such as market services, financing review, continuous supervision, risk response and liability investigation, and guide the entire market in improving the level of risk management. In handling of major cases, the SSE will take various measures such as conducting real-time monitoring, rapidly making inquiries, launching interviews, paying on-site visits, and promptly investigating and dealing with the cases, urge bond issuers to be active in repaying debts and disclosing information in accordance with rules, and tighten the responsibilities of intermediaries, so as to effectively safeguard the legitimate rights and interests of investors. The SSE will take a "zero tolerance" attitude to strictly investigate and quickly deal with the major violations of laws and rules on the basis of the requirements for the rule of law, in a bid to maintain the credibility of the market.
On the other hand, it is necessary to distinguish the different properties of the defaults and analyze objectively and truthfully the violations in the bond market. At present, as China’s economy is in a stage of transformation from high-speed growth to high-quality development, some companies have been trapped in bond defaults due to difficulties in production and operation, which is a normal market phenomenon, with overall default rate not at a high level in the market. Regarding this type of violation, we can and should take a market-oriented principle and approach in mitigating and defusing the credit risks. In recent years, the SSE has successively launched a series of risk management tools including sell-back and resale, bond repurchase and bond replacement, so as to facilitate the issuers' active efforts in conducting the liquidity management and optimizing the debt structure; bond extensions, sell-back cancellations and other actual practices have also provided platforms for the market participants to defuse risks through self-organized negotiations; and the introduction of the specific bond transfer and the anonymous bidding mechanism provides the defaulted bonds with a channel of exit from the secondary market, thus effectively improving the effectiveness of risk management.
3. The SSE will optimize the structure of bond products and steadily promote the high-quality development of the SSE bond market.
In 2020, in the face of grave and complex situations at home and abroad, especially the severe impact of the COVID-19 pandemic, under the strong leadership of the CPC Central Committee and the State Council, China has maintained stable economic operation on the whole, showing an obvious trend of economic recovery. Similarly, the SSE bond market has also experienced an extraordinary year, with a general trend of steady development. In 2020, entity companies issued RMB 2.95 trillion of corporate bonds in total on the SSE, which has played an important role in increasing the proportion of direct financing and reducing the costs of social financing, and strongly supported the development of the real economy. A number of companies in urgent need of financing have overcome the difficulties by raising funds through the issuance of corporate bonds, and some enterprises have also achieved innovation and development, and transformation and upgrading through bond financing. Recently, under the leadership and deployment of the Financial Stability and Development Committee under the State Council, the disorderly defaults of a small number of issuers have been dealt with in a timely and effective manner, the market sentiments have stabilized and confidence of the market has been restored.
Going forward, the SSE will, on the basis of the general requirement for pursuing progress while ensuring stability, earnestly study and judge the developments and situations of the bond market, strengthen supervision, optimize the structure, continue to improve mechanisms, advance market innovation, and give better play to the market function of serving the real economy. First, we will continue to optimize the market structure, support high-quality companies in issuing corporate bonds and reducing financing costs, and build the SSE bond market into an important place for high-quality companies to raise medium and long-term funds. Second, we will continue to improve the market mechanisms, deepen the reform of the registration-based bond issuance system, propel the interconnection of the basic facilities of the SSE and the inter-bank bond market, and support the participation of the banks in the exchange bond market, so as to stimulate the market vitality. Third, we will continue to advance innovation in bond products, and make every effort to ensure the smooth implementation of publicly offered REITs and expand the scope of the pilot program, so as to provide necessary market tools for increasing the proportion of direct financing. Fourth, we will strengthen the management of market expectations, build the market consensus, and strengthen communication with market institutions and investors, so as to jointly create a sound market ecosystem and steadily boost the high-quality development of the bond market.
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