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THE GROWING BOND MARKET OF CHINA
by
Ping Wang
China resumed Treasury bond issuance in 1981. On the late 1980s, the Treasury bond
was first allowed to be traded over several counters, which means the RMB Bond’s
secondary market was finally formed. Since the establishment of Chinese stock
exchange, the T-bond started centralized trading in stock exchange market on the
early 1990s.
However, due to lack of infrastructure and Centralized Securities
Depository (CSD), China’s bond market suffered serious strikes.
In order to build
up a safe, efficient and low-cost bond market, the State Council authorized People’s
Bank of China (PBC) to establish an Inter-Bank bond market in 1997.
Since then,
the development of RMB bond market is growing fast and healthily.
Today, the
RMB bond market has the biggest trading volume and is one of the most important
financial markets in China. What’s more, it plays a critical role in supporting China’s
fiscal and monetary policy, and sustaining financial revolution.
I. Structure of RMB bond market
After more than ten years development, the RMB bond market was formed by four
correlated models and a two-level custody structure.
Quote Driven, Order Driven, Wholesale and Retail.
market is shown as below:
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The four models consist of
The structure of the RMB bond
Chart 1 China Bond Market Structure
China’s Bond Market
Quote Driven
Market Type
Order Driven
CCDC
（General Custodian）
Custodian
Commercial banks
China Clear
(Sub-custodian)
(Sub-custodian)
Inter-bank Market
Commercial Bank
Exchange Market
(Wholesale)
Counter Market
Negotiating
Bid-Asking
Institutional Investors
Markets of transactions
Pricing
Match Making
Individuals
Individuals
Non-financial institutions
Non-bank institutions
Market participants
The Treasury bond market is the most typical and comprehensive market.
The
Treasury bond either can be traded in the inter-bank market and commercial bank’s
OTC market in the form of quotation driven or be traded in the stock exchange
markets (such as Shanghai Stock Exchange) in the form of order driven.
Except for
a small part of corporate bonds and list companies’ convertible bonds can be traded in
the stock exchange, all the other bonds can be traded in the inter-bank market.
Some
cross-market bonds can be transferred among different custodian organizations.
At
present, the main trading type in the inter-bank market is collateral repo and spot
trading; forward trading and buy-sell repo are few.
The inter-bank market also has
Bonds Lending business, but its trading volume is little.
The trading types of
exchange markets include spot trading, collateral repo and buy-sell repo.
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Individual
investors only can participate in the spot trading over the commercial bank’s counter
market and stock exchange.
China Government Securities Depository Trust & Clearing Co., Ltd (CDCC) was
established in 1996.
The set up of CDCC realized the central custodian of all
marketable RMB bonds and achieved the dematerialization of the bonds. This is the
most essential condition of building a safe, efficient and low-cost bond market.
Under the guidance of PBC, CDCC developed the Long-distance Bond Auction
System and Open Market Operation System, which started operation in 1998.
The
Open Market Operation System provides a technological platform for the open market
operation of PBC, while the Long-distance Bond Auction System supports the
issuance of most bonds including government bonds and PBC’s central bank bills.
In 2004, the linkage of CDCC’s Debt Book-entry System and PBC’s Large-value
Funds Transfer System enable deposit institutions exercise the central bank’s Delivery
versus Payment (DVP) settlement on the real time base. The realization of DVP
indicates the finality of market efficiency and the settlement has achieved virtual
improvement.
In 2005, CDCC’s Debt Book-entry System was connected with the
China Foreign Exchange Trading Center’s RMB Bond Quotation& Trading System.
The linkage of the two systems enables the Straight Through Processing (STP) of
bond trading and settlement.
The states of above mentioned infrastructures have
achieved international standards. In 2007, the Shanghai Stock Exchange implement
the Electronic Platform of Fixed Income Securities, begins the quote driven trading
model in the exchange market.
II. RMB Bond Market Development
1. Classification of RMB Bond
At present, in terms of issuer type, marketable RMB bonds can be classified into
government bonds, central bank bonds, policy bank bonds, commercial bank bonds
(including secondary bonds, ordinary bonds and Hybrid capital bonds), non-bank
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financial institution bonds, securities corporate bonds, securities corporate
commercial papers, corporate bonds, commercial papers, mid-term notes as well as
the “the panda bonds”. Panda bonds are the RMB-dominated bonds issued by
international financial institutions within the boundaries of China. In terms of interest
pattern, zero-coupon bonds, interest-bearing bonds and repayment upon maturity
bonds are been separated, and the interest-bearing bonds can also be divided into
floating rate bonds and fixed rate bonds.
bonds are mainly included.
In terms of option, callable and putable
Besides asset-backed bonds and mortgage-backed bonds,
there are few of USD-dominated bonds issued by local institutions within our country.
In 2008, listed companies began to issue corporate bonds, but its issuance volume is
relatively small.
2. Issuance of RMB Bond
Since 1998, the majority RMB bond is issued through Long-distance Auction System,
including government bonds, central bank bills, policy banks bonds, parts of the
commercial banks bonds and corporate bonds. Those bonds’ coupon rates are
determined through competitive bidding. The bond underwriting syndicates (the
issuance objective of central bank bills is the central bank’s counterparty in its open
operation), which are organized by issuers participate in the tender and implement
stand-by underwriting system. The issuance method for small size issuers is the
underwriting syndicates which are organized by underwriters use book building to
determine the coupon rate. The issuances of RMB bond have fully achieved
market-oriented.
The bond issuance volume increase rapidly. Since 2002, the average annual growth is
42.16%. The volume in 2009 is 13.94 times more than the issuance volume in 1998,
as shown in Chart 2. The bond structure has increased significantly, as shown in
Chart3.
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Chart 2 Growth of Issuance Volume
100,000.00
1000
900
800
700
600
500
400
300
200
100
0
Issuance Volume(100 million)
Issuance Number
80,000.00
60,000.00
40,000.00
20,000.00
0.00
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Issuance Volume(100 million) 3,7316,2034,3694,4145,8489,98017,8427,4742,3157,0979,7570,7486,49
Issuance Number
20
13
39
32
50
89
135 186 342 499 636 643 935
Chart 3 Issuance Volume By Bond Type(2009)
Corporate Bonds Local
0.05
Government
Middle Term Savings
Bonds
NotesTreasury Bonds
0.02 Commercial
0.02
0.08
Paper
Policy Bank
0.05
Collecting
Bonds
Notes
0.14
0.00
Treasury Bonds
0.15
Commercial Bank
Bonds
0.03
Central Bank
Bills
0.46
Data source: www.chinabond.cn
3. RBM Bond Depository Balance
By the end of December 2009, CCDC had 1703 bonds under custody, 482more than
the previous year.
The RMB bonds balance grew by nearly 3.09 trillion RMB to
17.54 trillion RMB, up by 16.01% over the year of 2006.
totaled 6.73billion USD, up by 28.68%.
The USD bonds balance
The marketable volume of bonds in the
inter-bank market reached 15.98 trillion RMB as of the end of December, taking
up91.16% of the total bonds balance.
The marketable volume of bonds in the stock
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exchanges is 0.28 trillion RMB, accounting for 1.61% of the total bonds balance; the
marketable volume of commercial banks bonds on over-the-counter (OTC) market
was 0.14 trillion RMB, which was 0.77% of the total bond balance.
In the aspect of
bonds balance, T-bonds, central bank bills and policy bank bonds constituted the core
part of the overall volume of all deposited bonds, each type accounting for about one
third of the total volume respectively.
Treasury bonds balance rose to 5.74 trillion
RMB, 32.75% of the total volume; Central Bank bills were 4.23 trillion RMB,
occupying a proportion of 24.15%; policy bank bonds were 4.45 trillion RMB,
accounting for 25.38%; of the total volume; the rest of other types of deposited bonds
constituted 17.72% of the total volume.
In terms of growth rate of the balance
volume，the middle term notes recorded the highest growth rate of 416.57%; the
savings treasury bonds ran the second for an increase by 141.67%; the Non-bank
Financial Institution Bonds increased by 68.18%.
With a view to the deposited bond
structure on maturity, below-5-year bonds reaching 10.68 trillion RMB, made up the
majority share of 61.99% of the total bonds balance; 5-to-10-year bonds aggregated to
3.92trillion RMB, accounting for 22.37% of the total bonds balance; 10-year-above
bonds recorded 2.74trillion RMB or 15.64%.
Chart 4 Bond Balance During 1997-2009
200,000.00
1800
150,000.00
Volume under Custody(100 million)
1600
Number under Custody
1400
1200
1000
100,000.00
800
600
50,000.00
400
200
0.00
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0
Volume under Custody(100 million) 4,780.7 10,480. 13,188. 16,746. 19,727. 28,332. 37,476. 51,625. 72,592. 92,452. 123,338151,102175,294
Number under Custody
43
54
103
129
138
194
255
327
514
774
997
1,211
1,691
Data source: www.chindbond.cn
4. The Secondary Market Trading of RMB Bond Market
In China’s secondary bond market, 1039 thousand bond transactions were settled in
2009 with a total volume of 125.95 trillion RMB.
96.91% of the transactions took
place in the inter-bank bond market; 3.08% at stock exchanges and 0.01% over the
commercial bank’s counters.
The settlement volume is 3885980 million and 6284
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million RMB separately in the stock exchange market and the over-the-counter
market where individual investors were more active. Table 1 shows the bond market
transactions and settlements in 2009.
Table 1 Complete Market Bond Transaction & Settlement (2009)
No. of Settlements
Markets
（10 thousand）
Inter-bank Market
Stock
Shanghai Stock
Exchange
Exchange
Market
Shenzhen Stock
Par value/Volume
（100 million RMB）
Percentage
（％）
340.46
181.75
1220648.49
38104.8
96.91%
3.03%
88.39
755
0.06%
56.89
667.49
62.84
1259571.13
0.00%
100%
Exchange
Commercial Bank OTC
Total
Data source: www.chinabond.cn; www.sse..com.cn; www.szse.com.cn
5. The Institution Investors in the RMB Bond Market
The commercial banks were still the main investors of bonds, whose bond holdings
accounted for 70.08% of the total deposited market bonds in 2009, as shown in Chart
5.
The special settlement members are the second investors in the Inter-bank
Market , holding
12.24% bond balance of the total volume. The insurance
companies and mutual funds also demonstrated a strong momentum in the bonds’
holdings, the bond holding volume are 8.99% and 4.54% separately.
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Chart 5 Bond Holdings by Investors Type
Funds
Institutions
Individuals
Insurance 5%
Securities
1% Exchanges
Insitutions
2%
Companies
9%
1%
Credit
Cooperative
Banks
3%
Special
Members
11%
Commercial
Banks
68%
Data source: www.chinabond.cn
6. The Price Index System of the RMB Bond Market
With the rich variety of bonds and rapid growth of the transaction size, the bond yield
curves with different credit ratings and coupon types have been formed. At present,
the “ChinaBond” Yield Curve System which is formed by CDCC is the most
complete and transparent yield curve system and carries a high authority in China. It
is now accepted by the majority of the market participates. Furthermore, the
“ChinaBond” Yield Curve has gained initial recognition and close attention from the
country’s three supervisory sectors, i.e. the Ministry of Finance, central bank and
China Banking Regulatory Commission. The China Banking Regulatory Commission
has officially identified three “ChinaBond” yield curves as the banking industry’s
market risk measurement benchmark. As October 2008, the “ChinaBond” Yield
Curve System has a total of 453 curves, which can reflect the marketable RMB bond
yields fluctuations and their credit spreads. The curves are now released daily through
CCDC’s Chinese/English websites (www.chinabond.com.cn/www.chinabond.cn) and
domestic and international information providers, such as Reuters, Bloomberg.
Furthermore, the yield curve is also used by CDCC to calculate bond valuation, which
is considered as the mark to market reference price. Finally, the company calculates
“ChinaBond” Index based on the bond valuation. The Index can not only reflect the
whole RMB bond market price fluctuations, but also can be used to measure
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institution’s bond investment performance. Overall, the RMB bond index system has
reached a very high level in terms of integrity, fairness and transparency.
7. Short-term Outlook of the RMB Bond Market
The basic structure of the RMB bond market has been formed. In the short term, the
market should be improved and complemented in terms of management and function
in the following areas. First of all, the bond market supervisory authorities should
improve their supervision effectiveness by making efforts to improve cooperation
among different departments and reducing their friction into a minimum level.
Secondly, to improve the credit rating quality and increase the real economy related
bond issuance size. Although those bond issuance size increase rapidly, it accounts for
6.2% of the total bond depository balance. Thirdly, on the premise of setting up a
reasonable mechanism to manage risk efficiently, should promote the innovation of
bond-related derivatives steadily. Finally, bettering the market makers system,
improve the effectiveness of market markers as soon as possible and further to
improve the price discovery mechanism.
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III. RMB bond market’s functional role during the financial reform
In general, the basic function of bond markets is to achieve optimal allocation of
financial resource by direct financing and investment.
financial markets.
This role is similar to other
However, the unique character of bond market is that the
government is its direct and frequent market participant.
The bond market is the
market operation platform of the government’s Macroeconomic policy.
Although
the RMB Bond market has just 10 years development, it plays a significant role in
China’s financial reform.
(1) The bond market creates conditions for monetary policy and fiscal policy’s
market operation. On the early 1990s, mainland China’s financial reform has come
into a substantive phase.
Though, the PBC has exercised central bank’s role for ten
years, its monetary policy remained planned orders of direct management of the loan
limits. One year after the establishment of inter-bank bond market, the central bank
achieved indirect financial control through Open Market Operation (OMO).
OMO is
the most frequent and important method for monetary policy’s fine-tuning.
After
1999, in order to step up the infrastructure construction, the government implemented
active fiscal policy, i.e. issuing government bonds in a plentiful and frequent way.
Due to improved bond market conditions, the issuance of government bond is more
efficient but at low cost. Above all, the bond market gives strong support for the
implementation of active fiscal policy.
Meantime, the bond market plays a role in
supporting the coordination and integration of fiscal policy and monetary policy.
(2)
The bond market supports bank reform. At the early stage of bank reform,
stated-owned special banks were faced with the commercialization revolution.
primary task was to peel off the special banks’ policy business.
The
Due to this reason,
three policy banks were finally set up. Policy banks’ liabilities were mainly gathered
through issuance of policy bank bonds.
for policy bank bonds’ issuance.
Improved bond market gives strong support
Until now, the aggregated issuance volume of
policy bank bonds is more than 8230 billion RMB, indicating business development
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progress achieved by policy banks and also success of the bank reform.
Other
commercial banks who participate in the bond market actively also enjoy the
development success.
Bond market is considered by commercial banks as a new
way of assets and liabilities’ allocation, intermediate business, product innovation and
capital supplement; provided impetus for commercial banks’ operating concepts and
management mechanism.
(3) The bond market creates conditions for interest rate marketization. The
RMB bond market has fully achieved market-oriented pricing.
The Auction Model
is adopted by most bonds; secondary market’s price is marketable and very sensitive
to related economic policy, especially to monetary policy.
institutions pay much more attention to interest rate risk.
Today, financial
Their awareness to interest
rate risks have converted and improved due to past ten years’ interest rates changes.
A certain number of experienced people to financial product design, pricing and sale
are appeared through their participating in bond market trading.
As the bond type
and trading volume getting more and more abundant, CGSTDC’s research and study
on yield curves have experienced nearly ten years.
Today, CGSTDC’s yield curve,
namely “Chinabond” yield curve can fully and objectively reflect bond yield cure
changes.
What’s more, the interest risk monitor function and financial assets transfer
pricing function of Chinabond Fixed-rate Treasury Yield Curve began to play a role.
(4)
The bond market provides an enlarged space for corporations’ direct
financing.
At the moment, there are more than 5990 non-financial institutions
among 9247 inter-bank market participates.
financial institutions indirectly.
They can have bond trading through
Although corporations’ trading volume only
accounts for 1% of the total trading volume, bond market is a safe and fine investment
strategy.
In recent years, enlarging corporations’ direct financing is considered to be
an important reform strategy of reducing indirect financing.
Up to now, about 300
companies issued worthy 4702 billion RMB bond and commercial papers are traded
in the market.
A large growth of corporate bonds issuance and trading are expected
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in the future years.
(5) The bond market creates conditions for enlarging RMB’s international
impact. As China’s economy growing continuously and RMB’s status is getting
stable, China’s international financial impact will also grow constantly.
At present, a
more realized strategy is to open RMB bond market to international investors.
With
respect of RMB bond market’s current development, the RMB bond market has
certain attraction to international investors and the attraction will grow.
This will
also be a significant opportunity for RMB bond market’s future development.
IV. Conclusion
Nevertheless, with the growth of China’s economy, the RMB bond market is a new
market with rapid growth. Compared with other advanced markets, the RMB bond
market is still inadequate in several areas due to its short time development, but we
are making efforts to improve and complement the market functions. People are fully
confident that with the growth of China’s economy and firm of RMB currency, the
RMB bond market will become an international, attractive and competitive market.
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