THE Shanghai Stock Exchange has banned individuals from investing in bonds privately issued by small and medium enterprises (SMEs), the latest in a series of steps to tighten regulatory control of the high-yield, high-risk fixed income market.

    The ban also bars institutions from selling individual investors any product containing bonds issued by SMEs, widely known in the industry as “junk bonds.”

    Firms established by limited liability partnerships are also banned from investing in junk bonds, according to new rules.

    “Those above-mentioned investors who already own such bonds can hold or sell them, but they are banned from building fresh positions,” the exchange said.

    The SME bond market was launched in early 2012 in order to help develop China’s wider bond market and provide an alternative financing channel for SMEs, many of which have difficulty accessing bank credit.

    However, analysts soon began warning that the market was distorting investors’ behavior, as they regarded the high yield bonds as virtually risk free because local governments were unwilling to allow even small, economically insignificant issuers to default.

    Concerned about a potential explosion in nonperforming debt, the government has moved to systematically suppress the high-yield bond market, most recently by preventing weaker issuers from using the bond market as a refinancing tool. (SD-Agencies)