Download AssetSecuritization(China)

Development of the
Securitization and Credit
Guarantee Market in China:
Comments
S. Ghon Rhee, Ph.D.
K. J. Luke Distinguished Professor
of International Finance and Banking
University of Hawai’i
APEC Initiative on Development of Securitization
and Credit Guarantee Markets
Second High-Level Policy Dialogue
22 March 2004, Hong Kong
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Quick Summary: Bond Market
Government Bonds
Outstanding (2003)
(In Bill RMB)
F-bond
1147
31%
T-bond
2109
57%
PBC Note
333
9%
E-bond
111
3%
Corporate Bonds Outstanding: RMB 50 billion (2003)
Equivalent to less than 1% of GDP
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Status of T-Bonds
Issued in 2003
Unit: Billion RMB
Type
Assigned
Secondary Market
Book-Entry
Bonds
Issue
Amount
377.88
Inter-Bank Market 335.50
Exchange Market
42.38
Savings Bonds
Total
OTC Market
Asia-Pacific Financial Markets Research Center, University of Hawaii
250.46
628.34
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Idiosyncratic Features
of the CGB Market (I)
1. Multipartite Structure of Government
Bond Markets
a. Dual Supervisory Structure of Primary Market
T-Bonds and E-Bonds:
F-Bonds:
MOF
PBC
b. Tripartite Structure of Secondary Market
Inter-Bank Market under PBC
Over-the-Counter (OTC) Market under PBC
Exchange Market under CSRC
C. Meaning of the OTC Market in China?
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Trading Value of
Government Bonds
(1996-2003)
Bill RMB
12000
10000
8000
6000
4000
2000
0
1996
1997
1998
Spot Inter-bank
1999
Spot EX
2000
2001
Repo Inter-bank
2002
2003
Repo EX
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Idiosyncratic Features of
the CGB Market (II)
2. Secondary Markets: Money Market
rather than Bond Market
Inter-bank Market: REPOs are bond collateral
loans among banks
Exchange Market: REPOs are short-term
loans among securities
companies
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Idiosyncratic Features of
the CGB Market (III)
3.
Missing Links in the Market
a. T-Bills:
Money Market in China has been
developed without T-Bills
Maturity Structure of Bonds Issued in 2001
2 years: 4% of total issues
3 years: 34%
5 years: 21%
7 years: 14%
10 years: 16%
15 years: 3%
20 years: 8%
b. Interest Rate Risk Hedging Instruments
Bond Futures: Banned in 1995
Short-term Interest Rate Futures: Not Available
No Short Sales allowed
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Idiosyncratic Features of
the CGB Market (IV)
4. Missing Links in the Market-Continued
c.
d.
e.
Foreign Participation in Primary and
Secondary Markets except QFIIs
Asset-Backed and Mortgage-Backed
Securities
Municipal Bonds
Revenue Source: 1/2 from Municipal Governments
Expenditures:
2/3 by Municipal Governments
Municipal Bonds may rely on ABS scheme using future
cash flow of municipal governments
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Idiosyncratic Features
of the CGB Market (V)
5. Benchmark Interest Rates
a. Deposit interest rates are serving as
benchmark
Corporate bond yields should stand at 40%
above the deposit interest rates?!
b. Why very little differences are observed
between savings bonds and book-entry
bond yields?
Savings Bonds:
Book-Entry Bonds:
Syndicated Underwriting
Uniform Price Auction Method
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Benefits of Securitization:
China’s Perspective



Banking Sector Problem Solution:
NPLs Resolution
Financial Sector Stability:
Residential Mortgage-Backed Securities
Economic Growth:
i.
SME financing
ii.
Infrastructure finance
 Development
of Corporate &
Municipal Bond Markets
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Complementarity of Asset
Securitization and Corporate
Bond Market Development (I)
ABS: Major role in developing US bond
market with Fannie Mae and
Freddie Mac
 ABS: Important investment vehicle for
institutional investors
 ABS issuance amounted to ½ of total
corporate bonds issued in 2002 in Korea

Asia-Pacific Financial Markets Research Center, University of Hawaii
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Complementarity of Asset
Securitization and Corporate
Bond Market Development (II)

Guaranteed bonds:
Major road block to the development
of corporate bond market in other
Asian economies in the past
Credit enhancement built in ABS allows to
get around it
 Credit rating culture can be promoted with
ABS market development

Asia-Pacific Financial Markets Research Center, University of Hawaii
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China Panel’s
Recommendation on ABS
Trading
ABS Be Traded on Interbank Bond
Market First
(Institutional Investors only)
Asia-Pacific Financial Markets Research Center, University of Hawaii
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The Effectiveness of This
Recommendation is
Questionable for Two Reasons
1. The Interbank Market is a money
market rather than a bond market
2. A Comprehensive Plan will be
needed to consolidate segmented
secondary markets
Asia-Pacific Financial Markets Research Center, University of Hawaii
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SME is an Important
Component of the Economy
Source: Ayyagari, Beck, and Demirguc-Kunt (2003)
Asia-Pacific Financial Markets Research Center, University of Hawaii
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Mahalo
for You Attention!
Asia-Pacific Financial Markets Research Center, University of Hawaii
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