CHINA is tightening the leverage of structured asset management plans that invest in bonds, highlighting regulators’ concern about financial risks as the number of corporate defaults surge.

    The China Securities Regulatory Commission said the size of the senior tranche of fixed-income products should not be more than three times that of the junior tranche, according to a statement, which didn’t specify the previous figure.

    Senior portions of such products are usually bought by banks’ wealth management products, which help brokerages and asset management firm subsidiaries to boost their buying in the bond market. The cap before was 10 times, according to Industrial Securities Co.

    “The regulators have realized the possible risks the leverage can bring,” said Fan Lei, an economist at Mizuho Securities Asia Ltd. “The new rules would help lower financial risks.”

    Chinese regulators are seeking to cut bond investors’ leverage after seventeen publicly traded bonds in the nation defaulted this year amid the weakest economic growth in a quarter century, versus seven in 2015. Earlier this month, one of the bond clearing houses tightened rules on leverage in the corporate note market by lowering ratios that determine how much investors can borrow to buy new securities using holdings of exchange-traded company debentures as collateral.

    The regulation, which took effect yesterday, applies to privately raised funds managed by brokerages, asset management firms or futures companies, the statement said. The rules will apply to new products sold after the regulation takes effect, according to a separate statement.

    Bond investors have borrowed more funds to boost their returns as yields decline. The outstanding amount of repurchase agreements in China’s interbank market, used by bond traders to amplify their buying power, jumped 21 percent in June to 9.4 trillion yuan (US$1.4 trillion) from May, the highest level this year.

    For asset management plans that focus on equity investments, as well as ones that invest in both stocks and bonds, managers can borrow up to 100 percent of money invested in their funds, according to the statement, which didn’t specify what the previous ratio was.

    Financial institutions selling the products shouldn’t guarantee minimum returns or no loss of principal, the statement said.

    (SD-Agencies)