SSE Answers Questions on Disclosure of Annual Reports of Corporate Bonds in 2020

Lately, an official from the Shanghai Stock Exchange (SSE) answered questions from the press on the disclosure and regulation of the annual reports of corporate bonds in 2020.

1. Please brief us on the introduction of the direct channel system in the disclosure of the annual reports this year.

In recent years, with the gradual improvement in the self-discipline rules system of exchange-traded bond market and the standardization of information disclosure, the market has been paying more attention to the issuer's periodic reports and other disclosure documents. In 2021, to further implement the spirit of registration system reform and optimize the mechanism arrangement of independent information disclosure of market entities, the direct channel system, launched by the SSE, has been formally introduced in the disclosure of annual report of corporate bonds of 2020.

To ensure the smooth implementation of the first direct channel disclosure of the annual reports, the SSE made active arrangement in market organization, technical support and other aspects. Besides, it guided the issuers to do relevant work through business training and online communication. According to the overall disclosure, the smooth running of the annual report direct channel and the technology of the whole disclosure work improved the timeliness and convenience of annual report disclosure, with the disclosure rate of nearly 98%, edging up over the same period last year.

The implementation of the direct channel system has not only improved the information disclosure efficiency, but also is an important change in the regulation of the annual reports of the SSE. The SSE is integrating the existing regulatory resources and accelerating the transformation from the ex ante review of the form of information disclosure to the ex post regulation focused on violations. The adjustment of the self-regulation mode will further improve the overall operation efficiency of the market and strengthen the responsibility of the information disclosure obligors such as the issuers.

2. How was the overall operation of the corporate bond issuers in 2020?

Based on the disclosure of the annual reports, despite the impact of the Covid-19 pandemic, corporate bond issuers in 2020 still maintain good resilience, with stable overall operating conditions and solvency, and good credit status as a whole.

Firstly, the operating income of the issuers has kept growing. The average operating income of the issuers in 2020 is RMB26.806 billion, with a year-on-year increase of 2.50%. Among them, the business income of the construction and urban construction industry increased significantly, with a year-on-year increase of 16.80% and 17.64%, respectively. The average income of real estate issuers increased by 11.95% compared with the previous year. However, the business income of the issuers in some industries declined due to the epidemic situation and industry conditions. For example, the mining, transportation, storage and postal industries plunged over 10% in business income.

Secondly, the debt structure of the issuers was stable. In 2020, the average asset liability ratio of the issuers was 59.25%, inching up only 1.14% year on year, with the leverage level stable in general. The debt term structure and short-term interest-bearing debt ratio of the monetary funds of the issuers remained basically stable, with the proportion of short-term interest-bearing debts to interest-bearing debts of 33.08% (a year-on-year decrease of 0.67%), and the ratio of monetary funds to short-term interest-bearing debt of 1.74 (a decrease of 0.02 compared with last year). Among them, the total of the interest bearing debts of the urban construction enterprises has increased, with the proportion of short-term interest-bearing debt decreasing slightly, and the overall asset liability ratio of real estate enterprises was about 75% on average, with the leverage level the same as the year before on the whole.

Thirdly, there has been continuous improvement in the operating cash flow of the enterprises. In 2020, the net cash flow of the issuers’ operating activities was RMB 5.91 trillion, with a year-on-year increase of 7.95%, of which the cash flow from local state-owned enterprises was RMB1.22 trillion, with an increase of 14.48% compared with the year before. The net outflow of cash from the investment activities of the issuers was RMB10.48 trillion, with a year-on-year increase of 13.35%, while being affected by the easy financing environment, the net cash inflow of the issuers’ financing activities was RMB6.53 trillion, with a year-on-year increase of 53.30%. Thereinto, the financing activities of urban construction enterprises improved significantly, with an increase of 37.13% compared with the year before. However, affected by the industrial policies such as the "three red lines", the real estate enterprises’ financing activities significantly contracted, with the cash flow of financing activities tumbling by 94.43% compared with the year before.

3. What are the characteristics of the regulation of this year's corporate bond annual reports?

This year, the SSE has shifted its focus to compliance oversight. To do so, we carefully implement the requirements for the registration system with information disclosure as the core in the regulation of annual reports, optimizing services, and strengthen supervision. All this aims to effectively perform the exchange's front-line regulation and risk prevention and control responsibilities.

Firstly, we strengthened the requirements on timeliness and seriously handled the failure to disclose on time. In view of the violation of failing to disclose the annual reports on time, the SSE took into account the epidemic impact and the time overdue and took immediate self-regulatory actions to urge issuers to disclose the annual reports as early as possible in accordance with the principle of "timely discovery, timely prevention and timely investigation and punishment". For some issuers and relevant responsible persons who have delayed disclosure for a long time and have not corrected after supervision, the SSE strictly implemented the "zero tolerance" policy and quickly started disciplinary procedures. By strengthening investigation and punishment, and taking market discipline seriously, the SSE has earnestly safeguarded the regulated and orderly bond market environment.

Secondly, we strictly clarified the responsibility of the market entities and effectively improved the disclosure quality of the annual reports. In the annual report disclosure, some issuers have violated the regulations, such as failing to truthfully disclose the progress of the overdue of interest bearing liabilities, incorrectly disclosing financial data, incompletely disclosing matters affecting solvency. The SSE took regulatory measures on the relevant issuers and intermediaries immediately. Meanwhile, the SSE issued a special notice after the disclosure of the annual reports, requiring that each trustee should carry out self-check and self-correction on the disclosure quality and compliance of the annual reports of the issuer, and timely disclose and rectify the violation.

Thirdly, we focused on risk and the disclosure of significant events for bond repayment. In the annual report review of this year, the SSE made a detailed analysis on the industries that previously had risk exposures and were more seriously affected by the epidemic, and the issuers with high debt repayment pressure, or major negative changes in financial indicators such as operating status or solvency of the year. The SSE conducted annual report inquiries and risk investigations on relevant entities, urged relevant entities to further strengthen the disclosure of risk information, and make effective arrangements for the repayment funds and the subsequent risk prevention and control.

In view of the problems in the disclosure of annual reports, the SSE has issued nearly 100 regulatory letters such as regulatory inquiry and regulatory warning, and took disciplinary measures against more than 20 issuers and relevant responsible persons. At present, the SSE’s review and regulation of the annual reports is still in progress. Next, the SSE will continue to promote relevant self-regulatory work with the inquiry feedback and further verification, in a bid to improve the quality of information disclosure in the bond market.

4. What are the arrangements for the follow-up information disclosure of the SSE?

In the earlier stage, the SSE formulated or revised the relevant rules for information disclosure in the issuance and listing review and continuous regulation of corporate bonds in order to fully implement the relevant requirements of the Measures for Administration of Corporate Bond Issuance and Trading and the Measures for Administration of Information Disclosure of Corporate Debentures. Next, the SSE will continue to take information disclosure as an important basis for the development and the risk prevention and control of the bond market under the unified leadership of the China Securities Regulatory Commission. We will strictly implement the policy of "building the system, no intervention and zero tolerance", and promote the regulation of information disclosure in the bond market from the following aspects, so as to further promote the high-quality development of the bond market.

Firstly, we will continue to improve the construction of the rule system for information disclosure. According to the registration system, the SSE will issue the Listing Rules for Corporate Bonds and the Transfer Rules for Non-publicly Issued Corporate Bonds. It will also elaborate on the standards for the identification of violations in information disclosure and issue the implementation standards for self-regulation. All this aims to increase the transparency of regulation on information disclosure.

Secondly, we will promote the formulation of model texts for the prospectus and the trustee agreement. The SSE will guide market entities to agree among themselves on contract-based investor protection, liabilities for breach of contract and relief, and information disclosure commitments, so as to strengthen the internal information disclosure constraints among market entities.

Thirdly, we will further optimize information disclosure service. The SSE will work effectively on the application of the XBRL to periodic reports and temporary reports. We will promote the construction of the direct channel for bond information disclosure and gradually expand its scope of application.

Fourthly, we will continue to strengthen the regulation of information disclosure. According to the principle of "timely discovery, timely prevention and timely investigation and punishment", the SSE will timely investigate and punish information disclosure violations, clarify the information disclosure responsibilities of the issuers and the professional institutions, and continuously improve the efficacy of regulation.

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