Transcript China’s Bond Market: Progress and Perspectives

1
Readings
 Andrew H.chenm Sumon C.Mazumdar, and Pahul
Surana, China’s Corporate Bond Market, The Chinese
Economy, vol.44, no.5, September-October 2011
 NOMURA: China Bond Market Overview, June 2010
 Pierre Pessarossi, Laurent Weill, Choice of Corporate
Debt in China: The role of State Ownership, China
Economic Review, 26 (2013), 1-16.
2
Contents
 Introduction
 Theoretical and Policy Discussion
 Bond Market Development
 Discussion on Corporate Bonds
 Bond Market Structure
 Bond Trading
 Conclusions
3
1.Introduction
 The bond market, which is generally believed to be as
important to economic growth at the equity market,
seems to be entering into a new development stage.
 Total value of outstanding bonds remain at a relatively
stable in light of the total savings (21-23%) in the
country; far few of the individual investors actively
participate in the bond market than those that trade in
the stock market.
4
Three Stages
 Stage 1 (1988-1993): The over-the counter (OTC) bond
market coexists with the exchange bond market.
 Stage 2 (1994-1997): The exchange bond market
 Stage 3 (1997 to present): The interbank centered
market, coexists with exchange and OTC markets.
 China bond market structure
5
Outstanding Bond/Saving Ratios
2007
2008
2009
2010
2011
2012
2013
2014
Total
Saving
38.9
46.6
59.8
71.8
80.9
91.7
104.4
113.9
Trillion Yuan.
Household Outstanding
Saving
Bonds/TS, %
17.6
22.20
22.2
21.31
26.5
21.27
30.8
21.55
34.8
22.91
40.6
/
46.1
50.3
Outstanding
Bonds/HS, %
49.06
44.73
47.99
50.23
53.25
/
6
Discussion
 In terms of outstanding volume in total bond markets,
T-bonds accounted for 39.84% in 2011, and 35.09% for
policy and financial bonds and 25.07% for corporate
bonds, respectively.
 The bond markets, as one of the key constraints of
capital markets, are still in the early stage of
development and lagged significantly behind that of
the equity market before 2007.
 New features for the bond market development has
been emerged since 2008.
7
 The number of bond securities and bond derivatives
being offered for trading remains limited; trading
activities are light except for some treasury bonds or
central-bank notes.
 Although it will take many years before China’s bond
markets can become an efficient vehicle in capital
allocation, there’s no doubt that the role is increasingly
important and certainly has a good potential for
investors.
8
Development of Bond Market
2007
2008
2009
2010
2011
2012
2013
2014
Loans
3632.3
4904.1
9594.2
7945.1
7471.5
8203.5
8891.6
9781.6
Equity
433.3
332.4
335.0
578.6
437.7
250.8
221.9
435.0
E/L Ratio
11.93
6.78
3.49
7.28
5.86
3.06
2.50
4.45
C.Bond
228.4
552.3
1236.7
1106.3
1365.8
2249.8
1811.1
2425.3
B/L Ratio
6.29
11.26
12.89
13.92
18.28
27.42
18.52
24.80
Billion Yuan.
9
Equity and Bond Growth
Billion Yuan
3000
2500
2000
1500
1000
500
0
2007
2008
2009
2010
Equity
2011
2012
2013
2014
Bond
10
E/L and B/L Ratios
%
30
25
20
15
10
5
0
2007
2008
2009
2010
Equity/Loan
2011
2012
2013
2014
Bond/Loan
11
 When the equity markets encounter a two-year
period of bearish run, the role of fixed income
markets in facilitating development of large
companies has become more significant.
 The amount of capital raising for stock and bond
markets has been changing over the past five years.
12
Objective
 One objective of this lecture is to review the brief
evolution of the Chinese bond market, outline the
current state of the market, discuss the
opportunities and challenges that face the market,
and offer some guidance for the long-term
development of the bond market.
13
2. Theoretical and Policy Discussion
 Bond markets are important to economic growth
in China.
 The T-bond is a significant component of the
China’s bond market. At the end of 2011, the
nominal value of T-bond outstanding was 7.38
trillion Yuan.
 How about the contribution of corporate bonds to
economic recovery over the past five-year period?
14
A Macroeconomic Perspectives
 The cash flow provided by bond securities correlates
well with obligations of many institutional investors
such as banks, pension funds, insurance companies,
and helps such investors better match the maturity of
their assets and liabilities and manage risks.
 The bond market is particularly important to the
transition of the Chinese banking sector, which has
been ailing with the problem of non-performing loans.
15
 A more developed bond market is useful in helping
the banking sector diversify the risk of its holdings and
provide much-needed capital to the state-owned
enterprises, which used to heavily rely on bank loans.
 In the past five years, the corporate bond issuance has
been rising rapidly due to the change of government
policy preference.
16
A Microscope View
 The pecking order theory in modern corporate finance
theory mandates that debt financing is cheaper and
therefore more attractive than the alternative way of
financing through issuing equities for many
companies.
 Another important feature of the bond market in
developed markets is that bond investors play an
active role in monitoring and governing corporate
managers who tend to waste free cash flow, cash flow
in excess of that required to fund all projects with
positive net present values.
17
 The growth of the bond market can help
restore investor trust and confidence in the
stock market and may change corporate
governance.
18
Main Reasons for Undeveloped
Bond Market before 2008
 Government fiscal stance
 Property consideration of SOEs
 The performance in China’s fiscal stance has been
relative sound in terms of deficit/GDP ratio.: less
than 2.5% for the last decade.
19
The Government Fiscal Stance
Billion Yuan
Revenue
Expenditure
Balance
Deficit/GDP
2002
1890.36
2205.32
-314.96
2.62
2003
2171.53
2465.00
-293.47
2.16
2004
2639.65
2848.69
-209.04
1.31
2005
3164.93
3393.03
-228.10
1.23
2006
3876.02
4042.27
-166.25
0.77
2007
5132.18
4978.14
154.04
0.58 surplus
2008
6183.04
6259.27
-126.24
0.40
2009
6851.83
7629.99
-778.16
2.28
2010
8310.15
8987.42
-667.27
1.69
2011
10387.44
10924.78
-537.34
1.14
2012
11725.35
12595.30
-869.95
1.68
2013
12920.96
14021.21
-1100.25
1.93
20
Government Fiscal Stance
Billion Yuan
16000
14000
12000
10000
8000
6000
4000
2000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Revenue
Expenditure
21
Fiscal Stance
Deficit or Surplus/GDP
1
0.5
0
-0.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-1
-1.5
-2
-2.5
-3
Deficit or Surplus/GDP
22
Discussion
 Liability ratio refers to the ratio of the
balance of total debts to the GDP of the
current year.
 The public debt/GDP ratio has been very
stable for the past decade.
23
The Government Debt to GDP Ratio
2005
2006
2007
2008
2009
2010
2011
Total Debt
3261.42
3501.53
5207.47
5327.15
6023.77
6754.81
7204.45
Domestic
3184.86
3438.02
5146.74
5279.93
5973.70
6698.80
7141.08
External
76.55
63.50
60.73
47.22
50.07
56.01
63.37
Debt/GDP, %
17.64
16.19
19.59
16.96
17.67
16.84
15.24
Billion Yuan.
24
Government Policy Preference
 Years after profound changes have taken place
during the economic reforms, the central
government still plays a dominant role in
allocating credit in the economy, which can limit
the bond market’s role of resource allocation and
expand its role as well.
 Bank loans, originating mostly from state-owned
banks, lead the financing of most large-scale
enterprises.
25
The Traditional Explanation
 Bond financing, in contrast, is only accessible to
companies that are believed to have the highest creditworthiness and ironclad security, because regulators
are concerned about losing control of those companies
in the event of default.
 Given that the government is the debtor for the
treasury bond and ultimately debtor for most
corporate bonds issued by large state-owned
enterprises, the regulator’s concerns about credit
quality and default risk are not un warranted and
make debt financing somewhat less appealing.
26
Further Discussion
 Financial theories on the bond market
development.
 It is necessary to compare China’s case to
other large economies.
 Different features of bond market
development in variety of economies.
27
3. China’s Bond Marker Development
 The Chinese bond market has developed
dramatically since 2000. Chinese investors have a
wide choice of debt instruments with different risk
profiles and maturities.
 It was widely discussed that the most
underdeveloped component of China’s financial
markets is the corporate bond market six years ago.
28
Different Types of Bonds
 Government bonds are issued by the Ministry of Finance to
finance public expenditures. The interest earned on
government bonds is tax-exempt.
 The major types of government bonds are book-entry
bonds, which comprised 98.2 percent of total outstanding
government bonds.
 Book-entry bonds are issued and traded mainly on the
interbank and exchange markets, and target institutional
investors.
 Government bonds comprised 31 percent of the total bonds
outstanding in China as of May 2010.
29
Central-Bank Bills
 Central-bank bills are issued by the PBC to members
of the interbank market. These bills have short
maturities , and are designed to implement openmarket operation.
 In 2003, the central bank also started issuing bills to
absorb additional liquidity in the market (sterilization
bills).
 As of May 2010, central-bank issues comprised 24.6
percent of the Chinese bond market.
30
Policy and Financial Bonds
 Policy-bank bonds are issued by the three policy banks in
China.
 The policy banks are owned by the government and, given
an implicit government guarantee, can raise capital at
relative cheap rates to fund key national projects that are
not covered by the government’s budget.
 As of May 2010, policy bond issues represented about 25
percent of the Chinese bond market.
31
Financial Bonds
 Other financial institutions, such as commercial
banks, issue financial bonds, their own
subordinated debt, issue financial bonds to raise
capital.
 Issuance of policy and financial bonds has to be
approved by the State Council and PBC according
to the market issuing mode.
32
Nonfinancial Corporate Bonds
 Corporate bonds are an alternative to bank
financing for Chinese companies.
 Corporate bonds include corporate bonds, shortFinancial bonds
term financing bonds, ultra-short-term financing
bonds, medium-term notes, collective notes of
medium and small-sized enterprises, and private
placement note.
33
 There are four types of corporate bonds:
 Convertible bonds
 Short-term corporate financing bills
 Enterprise bonds
 Listed-company bonds
34
3.1 Evolution of Bond Market
 Since the start of 2001, China’s bond market has
developed steadily with market size gradually
increasing.
 In 2005, T-bonds issued 705 billion Yuan, while only
205 billion Yuan for corporate bonds.
 The following table provides the information of
China’s bond markets.
 The government bond market had an annual growth
rate of 26.9% during the period 1990-2005 in terms of
newly issued bonds, with total outstanding bonds
reached 7382.65 billion Yuan at the end of 2011.
35
Bond Outstanding at year-end
T-bonds
Policy & Financial bonds
Corporate Bonds
2001
1561.80
853.45
100.86
2002
1933.61
1005.41
133.36
2003
2260.36
1165.00
169.16
2004
2577.76
1401.93
201.86
2005
2877.40
1781.80
401.81
2006
3144.87
2283.50
553.29
2007
4874.10
2992.68
768.33
2008
4976.78
3668.60
1285.06
2009
5795.00
4481.88
2440.59
2010
6768.49
5236.32
3467.18
2011
7382.65
6501.88
4645.68
Billion Yuan.
36
The Size of Bond Outstanding
8000
7000
6000
5000
4000
3000
2000
1000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
T-bond
Financial Bond
2011
Corporate Bond
37
 The second largest component of the bond market
is called “policy financial bonds”, total outstanding
amount was 6501.88 billion Yuan at the end of 2011.
 “Policy Bonds” are issued by “Policy Banks”, which
belong to the Ministry of Finance, and the
proceeds of bond issuance are invested in
government run projects and industries such as
infrastructure construction.
38
Discussion
 Compared to government-issued bonds, the size of
the corporate bond market was minuscule before
2006. In terms of the amount of outstanding
bonds at the end of 2006, the corporate bond
market was less than one-tenth of the size of the
government bond market.
 However, over the past five years, the amount of
corporate bond issuance has increased, reaching
4645.68 billion Yuan and accounting for one-third
of the size of the government-issued bonds.
39
Outstanding Bonds to GDP Ratios
Corporate Bonds/GDP
T-bonds/GDP
Total Bonds/GDP
2001
0.92
14.24
2002
1.11
16.07
2003
1.25
16.64
2004
1.26
16.12
2005
2.17
15.56
2006
2.56
14.54
2007
2.89
18.34
32.49
2008
4.09
15.85
31.62
2009
7.16
17.00
37.31
2010
8.64
16.86
38.53
2011
9.82
15.61
39.19
40
Discussion
 The above table presents time series of the ratios
of the amount of T-bonds and corporate bonds
outstanding/GDP.
 The evidence shows that the corporate bonds/GDP
ratios has been rapidly increased, from 2.89% in
2007 to 9.82% in 2011, while T-bonds/GDP ratios
declined from 18.34% to 15.61%.
41
Rising Role of Corporate Bonds
20
18
16
14
12
10
8
6
4
2
0
2001
2002 2003 2004 2005 2006 2007 2008 2009
CB/GDP
2010
2011
T-Bond/GDP
42
3.2 A Failed Case
 As the Chinese economy reopened itself to the
foreign market and became the focus of the
country in the early 1980s, the bond market
witnessed resurgence in interest as well.
 In addition to the more traditional treasury bond
issuance, SOEs started issuing bonds with great
enthusiasm during the early 1990s.
43
 Most of firms issuing bonds were strictly subsidiaries
of various levels of government agencies, they were not
financially or legally constrained by bankruptcy
prospects, that is, they would face little adverse
consequences if there were a debt default or
bankruptcy filing.
 During the early 1990s, local government obtained
permission to enable local government-owned
enterprises to issue bonds and raised considerable
amount of capital through the bond market. Many of
the issuers defaulted and caused financial unstability.
44
Discussion
 As a consequence, SOE issued excessive corporate
obligations in the early 1990s, and many of them
ended up in default and resulted as non-performing
assets in the balance sheet of the state-owned banks,
the major holders of those securities.
 The state Economic Planning Commission decided to
close down the corporate bond market. That ban over
a decade ago still having a major impact on the
regulatory sentiment and the structure of corporate
bonds in China.
 Will the failed case be happened again?
45
3.3 Bond Derivatives
 Financial derivatives take two basic forms. They
may be contracts which commit the parties to buy
or sell financial instruments, such as long-dated T-
bonds, at set prices on some agreed future date.
There are known as forward or futures contracts.
 The size of financial derivatives in bond market
has been small.
46
Forward and Interest Rate Swap
Year
Forward trading Turnover
Interest Rate Swap
2006
66.45
35.57
2007
251.81
218.69
2008
500.55
412.15
2009
655.64
461.64
2010
318.34
1500.34
2011
103.01
2675.96
2012
16.61
2902.14
2013
2727.78
2014
4034.72
Billion Yuan.
47
The Size of Derivatives
4500
4000
3500
3000
2500
2000
1500
1000
500
0
2006
2007
2008
2009
Bond Forward
2010
2011
2012
2013
2014
Interest Rate SWAP
48
Discussion
 Standardized financial derivatives are traded on
organized markets, such as China foreign
exchange trading center (FXTC).
 The most important contracts on China’s FXTC are
the one-year interest rate contracts –swap,
accounting for 77.5% of the total forward trading.

49
Bond Market Development
 In 2003, the government policy document called
for “a greater role for direct financing through
establishing a multi-tier capital market system and
encouraging the growth of institutional investors.”
 Since then, the Chinese financial system has
broadened significantly and the government has
introduced various new debt instruments.
50
4. Discussion on Corporate Bonds.
 According to a study, corporate bonds comprised
only 4.5 percent of all bonds outstanding in China
in 2008.
 The lack of current development of the corporate
bond market is a direct consequence of the tight
regulation over issuance approvals.
 The state ownership issue!
51
 The Chinese financial system is characterized by a
weak corporate bond market and an overdominant banking industry.
 China’s capital allocation remains biased towards
inefficient state-owned companies, in the long run,
this misallocation of capital threatens the
development of the country.
52
A central government ownership
hypothesis
 Does state-ownership at the central level play a role on
the choice of debt financing ?
 As favoritism towards Central State enterprises has
been driven by the will to avoid corporate bond
defaults in the market.
 Discussion
53
Financial Theories
 Three financial theories have been provided to explain
the choice between public and private debt issuances
in the literature:
 Flotation costs;
 Asymmetries of information;
 And costs of debt liquidation and renegotiation.
54
Main Findings
 A well-functioning market can provide a better
allocation of capital in the economy, reduce credit
risk in the banking system and force financial
intermediaries to expand credit to new categories
of borrowers, due to increased competition.
 The development of the bond market remains
strikingly weak in spite of its recent expansion, due
to continued political intervention in the issuance
approval process.
55
 Central authorities continue to severely influence
firm’s choices of debt. Namely, Central State
owned firms are more likely to issue bonds than
syndicated loans in comparison to either Local
State owned or privately owned companies.
 Regulators prove to be cautious in the
development of the market by favoring Central
State owned corporations for which they share less
information asymmetries.
56
 Contrary to developed countries and other Asian countries,
debt choice weakly depends on financial factors in China.
 European case: larger firms with more financial leverage,
higher fixed assets to total assets, but fewer growth
opportunities are more likely to borrow from the
syndicated loan market, rather than the corporate bond.
 It is in favor of the flotation cost hypothesis because larger
firms tend to prefer bond issuance, rather than borrowing
on the syndicated loan market.

57
5. Bond Market Structure
 China’s bond market consist of the interbank bond
market, the exchange-traded bond market, and the
OTC market, which are supervised by different
regulatory bodies.
 One of the structural problems in China’s bond market
is its regulatory regime.
58
5.1 The Primary Market
 T-bonds, and financial policy bonds, and corporate
bonds are the major types of products in primary bond
market. Before 2011, the issuance volume of T-bonds
was much larger than that of corporate bonds.
 However, the corporate bond issuance reached 2.185
trillion Yuan in 2011, while 1.71 trillion Yuan for Tbonds.
 The primary market of bond issuance is largely
completed through syndication.
59
 Government bonds were mostly underwritten by
the four state-owned banks, while other
commercial banks and securities companies play
an active role in forming a syndicate to market
financial and corporate bonds.
 Most of the bonds are held by banks, insurance
companies, securities firms, and corporations.
 Mutual funds hold a relatively small fraction of the
total outstanding bonds.
60
Development of Corporate Bonds
 The impact of the 2007/2008 financial crisis on the
Chinese government bond development policy.
 Large efforts by the authorities to expedite the
development of corporate bond markets, have
been made progress.
 Corporate bond growth rate increased by nearly
100% in 2009, and the growth momentum
emerged again in 2011, increasing by 41%.
61
Issued Volume in Primary Market,
billion Yuan
Year
Government and Public Bond
Corporate Bond
2002
593.43
32.50
2003
628.01
35.80
2004
692.39
32.70
2005
704.65
204.65
2006
888.33
393.83
2007
763.70
505.90
2008
855.82
843.54
2009
1792.70
1586.40
2010
1977.83
1549.15
2011
1710.00
2185.07
2012
1615.4
3736.5, 71% growth
2013
2023.0
3669.9, 1.8% declining
62
Primary Market
4000
3500
3000
2500
2000
1500
1000
500
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Government & Public Bond
Corporate Bond
63
Regulation on CB Issuance
 The quota of enterprise bond issuance per
year was determined by the state council.
The China Development and Reform
Commission review the coupon rates and
underwriter qualifications.
 The regulation has a special preference to
bond issuance according to different
economic situation.
64
The Secondary Bond Market
 The secondary bond market is somewhat in a sense
that there are three markets:
 The interbank bond market
 The exchange market
 The over-the-counter (OTC) market.
 GPB: Government and public bonds;
 Repo: Repurchase trading.
65
Trading Turnover in Secondary Bond
Market, billion Yuan
Bonds
Spots Trading of GPB
Repo Trading of GPB
2002
3324.95
870.87
2441.96
2003
6213.64
575.61
5299.99
2004
5032.35
296.65
4408.66
2005
2836.79
278.06
2362.12
2006
1827.93
154.07
1548.73
2007
2066.70
126.70
1834.50
2008
2860.15
212.25
2426.87
2009
4005.90
208.60
3547.60
2010
7620.60
166.16
6587.78
2011
21634.95
125.33
20462.13
2012
88.60
66
Secondary Market
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Bonds
Spots Trading of GPB
2011
2012
Repo Trading of GPB
67
Discussion
 In 2010, the turnover trading of repo of T-
bonds in the interbank market reached
20.46 trillion Yuan in 2011.
 However, the spots trading of T-bonds only
reached 125.33 billion Yuan in 2011 and 88.60
billion Yuan in 2012, respectively.
68
Basic Observation
 China’s bond markets compared with
developed stock markets are far from being
able to meet market needs and still have a
long way to go in terms of product types,
structure and maturity.
69
6. Bond Trading
 The preliminary bond market was established in 1988 when
treasury bonds could be traded for the first time.
 After stock exchanges were established in the early 1990s,
most of the bonds and bond derivatives (repurchase
agreement) were traded at two stock exchanges.
 In 2007, commercial bonds pulled out the stock exchange
and established the interbank bond market, and the overthe-counter (OTC) bond market was started a few years
later in 2002.
 More recently, the outright repo agreement can be traded
both at the stock exchange and in the interbank bond
market.
70
6.1 Trading Practice
 The government stipulates a minimum tender
price which it expects to be below the price at
which the T-bond will trade in the market and
invites bides at the minimum or higher prices.
 By increasing the size of the issue it enhances the
liquidity of the existing bonds.
 A screen-based trading system.
71
The Interbank Market
 The interbank bond market relies on the National
Inter-bank Funding Center and the Central T-bond
Registration Company and provides a market for the
bond transactions and provides a market for the bond
transactions and repurchases of commercial banks,
rural credit cooperatives, insurance companies,
securities firms, and other financial institutions.
72
 Most book-entry T-bonds, policy financial
bonds are listed and traded in this market.
 Some bonds and bond derivatives started
being listed in the Shanghai Stock
Exchanges in the early 2000s.
 The OTC market remained moderately
active.
73
SHIBOR
 From January4, 2007, a set of new
benchmark interbank market rates, the
Shanghai Interbank Offered Rate (Shibor),
consisting of overnight rate, 1-week rate, 2week rate, was established.
 Shibor is an important interest rate base for
other financial trading activities.
74
SHIBOR
SHIBOR一年期利率
6.0000
5.0000
利率%
4.0000
3.0000
2.0000
1.0000
0.0000
2007/1/1
2008/5/15
2009/9/27
2011/2/9
2012/6/23
2013/11/5
75
6.2 Types of Bonds
 It has been discussed on the types of bonds.
 Urban investment bonds for local
government infrastructure projects.
76
Discussion
 On 27 April, 2005, PBC promulgated the measures
Governing the Issuance of Financial Bonds on the
National Inter-bank Bond market.
 Such measures aim at standardizing the issuance
on the national interbank bond market and
improve the market-based framework as well as
the fairness and effectiveness of market regulation.
77
2008-2012 Bond Issuance,
T-bonds
Local gov. bonds
Financial bonds
NDB policy bonds
2008
2009
2010
2011
2012
2013
855.8
1792.7
1977.8
1710.0
1615.4
2023.0
/
200.0
200.0
200.0
250.0
/
1179.7 1452.4
2349.2
2349.2
2620.2
2631.0
1082.3 1167.8
1997.3
1997.3
2141.5
1981.1
Bank common bonds
25.0
10.0
1.0
35.0
168.0
Bank subprime bonds
72.4
274.6
316.9
316.9
225.4
NDB: National Development Bank; Billion Yuan.
78
Continued
2008
2009
2010
2011
2012/2013
872.3
1663
1681
2310
3737/3670
Enterprise bonds
/
/
/
/
799.9
Short-term notes
433.2
461.2
674.2
803.2
837.0
/
/
/
/
582.2
Medium-term bills
408.9
698.7
492.4
727.0
845.3
Private placement
/
/
/
/
375.9
Corporate bonds
..
73.5
60.3
125.3
255.0/139.5
Asset-based securities
30.2
/
/
/
/
Corporate bonds
Ultra short-term bonds
79
Some Explanation
 Medium-term notes
 Ultra short-term financial bonds
 Private placement note
 Collective notes of medium and small-sized
enterprises’
 Local government investment bonds, will play a
key role in raising the huge amount of capital
needed for China’s urban infrastructure projects as
the nation strives to further urbanize itself.
80
Growth of UIB in Coastal Regions
700
8000
600
7000
500
6000
5000
400
4000
300
3000
200
2000
100
1000
0
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
发债数量
发债金额
81
Discussion
 New issuance of T-bonds are handled by the PBC,
which arranges the issue on behalf of the government
to distribute the bond to financial institutions
(investors).
 The auction differs in two respects: First, there is no
minimum tender price, and the issue is not
underwritten, though the government does reserve the
right to reduce the size of the issue in exceptional
circumstances.
 Secondly, bidders all have to pay the price they bid.
This increases the bidder’s risk.
82
Bond Issuance in 2012
Bonds
Treasury Bonds
Local gov. bonds
Financial bonds
NDB and policy bonds
Bank common bonds
Bank subprime bonds
Issuance Amount
Billion Yuan
1615.4
250.0
2620.2
2141.5
168.0
225.4
Growth y-on-y
Billion Yuan
-94.6
50.0
271.1
144.2
133.0
-91.5
83
Corporate Bonds
Bond
Issuance
Amount
Billion Yuan
Growth
y-on-y
Billion Yuan
3736.5
1381.7
Enterprise bonds
799.9
452.6
Short-term Financing Notes
837.0
33.8
Ultra short-term notes
582.2
373.2
Medium-term bills
845.3
118.4
Private placement of financing tools
375.9
284.0
Corporate bonds
255.0
129.8
Corporate Bonds
84
 Treasury bonds are issued to meet the national
government’s budgetary needs.
 Issuance has been fairly limited because China’s
fiscal position has been strong over the last several
years.
 High growth for corporate bonds in 2012.
85
6.3 Historical Changes in Trading
 before, 1993, treasury bonds were issued exclusively as
physical printed bonds, with which holders could
redeem at maturity.
 Treasury bond underwriting was complete as part of
administrative assignments.
 After 1993, treasury bonds started being issued as
book-entry and certificate bonds.
 Accordingly, the underwriting of treasury bonds has
shifted from administrative assignments to
syndication, which most of the time involves the four
state-owned banks.
86
6.4 The Role of Central Bank Notes
 Another form of governmental obligations, the central
bank note is much larger than treasury bonds in
issuing size. The central bank used central bank notes
as an important tool to adjust money supply and prime
interest rate.
 In recent years, faced with increasing capital inflows
and inadequate supply of MOF bonds, PBC issued
more of its own notes to conduct OMOs and “sterilize”
the large capital inflows.
87
PBC Notes as Sterilization
Trade Surplus
FDI Inflows
FX Reserves
FX Rates
2002
30.43
52.74
286.41
827.70
2003
25.47
53.51
403.30
827.70
2004
32.09
60.63
609.93
827.68
2005
102.00
60.33
818.87
819.17
2006
177.52
63.02
1066.30
797.19
2007
264.34
74.77
1528.25
760.40
2008
298.12
92.40
1946.03
694.51
2009
195.69
90.03
2399.15
683.10
2010
181.51
105.74
2847.34
676.95
2011
154.90
116.01
3181.15
645.88
2012
231.10
111.70
3279.85
628.55
88
6.5 Yield Spread of Bonds
 T-bond as a default-free financial product
 Spreads of corporate bond yields over T-bond yields.
 Lack of a well constructed yield curve is another
important factor in China.
 Given the small size of the public traded treasury bond
market and lacking of historical prices, we can only
plot “snapshots” of a partial yield curve (maturities
range from 1 year to 5 year only) based on pricing data
of treasury bonds in the national interbank market.
89
Further Discussion
 This is far from the standard yield curve covering
interest rates on bond maturities ranging from 1
month to 10 years.
 The deficiencies in the term structure of interest rates
hamper the development of derivatives markets that
enable firms and investors to manage risk, as well as
the effectiveness of the government’s macroeconomic
policies.
90
91
Interest Rates
92
3-Year Treasury Bonds
93
5-year Treasury Bonds
94
Discussion
 From the above comparison, it is clear
that the interest rate of T-bond to
saving interest rate is a little bit higher.
95
Regulations on Corporate
Short-term Bills
 The high hurdle set for corporate bonds can be sought
of as a defense mechanism against potential risk of
takeover by creditors.
 Until very recently, only firms with very sound
financial situations were granted access to the bond
market, while others in greater need of bond financing
were left out of the market.
 Only firms of the highest credit ratings can access the
corporate bond market. Almost all issuers enjoy the
AAA ratings.
96
 The Administrative Rules for short-term Financial Bills
was published on May 23, 2005, and stimulated the
recent growth of the bond market.
 Short-term bills are issued on the interbank market,
which is regulated and supported by PBC.
 Issuance are almost restricted only to companies with
very good credit ratings, and such short-term financial
bills have to mature within 91 days.
97
7. Conclusions
 Recent economic growth and bond market
development in China point to a more developed
bond market in the coming years.
 It is critical that the market plays an increasing
role in allocating resources and stimulating
sustainable growth.
98
 Consistent with such a policy preference, we
believe that Chinese bond market will witness
another wave of unprecedented growth in the
decades to come.
 Pessimistic or optimistic view for the development
of the bond market in China and the
modernization of the financial system.
 More……
99
THANKS!
100