CHINA’S securities regulators are taking steps to curb private bond issuance in a bid to contain credit risks at the nation’s weaker firms.

The China Securities Regulatory Commission (CSRC) and stock exchanges in Shanghai and Shenzhen have sent a window guidance to some brokerages to keep the outstanding value of privately sold corporate bonds on exchanges at or below 40 percent of issuers’ net assets, according to people familiar with the matter. New bond sales exceeding this ratio should only be used to repay old debt.

The move is set to limit a popular financing option for lower-rated firms and local government financing vehicles as China seeks to stem rising defaults in the 3.55 trillion yuan (US$500 billion) private placement market.

Deals are struck with a small group of qualified institutional investors, thus shielding firms from market volatility.

“The requirement will affect new debt sales by lower-rated companies, and it is likely that some issuers’ existing private bonds have surpassed that level,” said Yang Hao, fixed income analyst from Nanjing Securities Co.

Regulators have asked for the cap to be effective for new bond sales applications received after Sept. 19, said the people. One of the person, who was briefed by the CSRC, said the move is aimed at preventing companies from incurring excessive debt.

So far this year, Chinese firms have defaulted on 118 bonds, of which 47 were sold in private placements. (SD-Agencies)