“Raise the Ability of Exchange-traded Bond Market to Service Real Economy:” China’s State Media

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An editorial published by the financial news imprint of China’s Xinhua News Agency has called for the role of exchange-traded bonds to be expanded, as Beijing pushes for direct financing to assume greater prominence on the market.

The editorial published by China Securities Journal entitled “Raise the Ability of the Exchange-traded Bond Market to Service the Real Economy” (提升交易所债市服务实体经济能力) says that “the bond market is an important component of capital markets, yet at present the development of the exchange-traded bond market is comparatively lagging.

“Regulatory systems and mechanisms are inadequate, and market foundations are weak…experts recommend that the next step will be to strengthen regulatory coordination and overall planning, establish a high-quality exchange-traded bond market, further raise service functions, and better support the real economy and national strategy.

The editorial points to roaring growth in the market for exchange-traded corporate bonds since the release of the ‘Corporate Bond Issuance and Transaction Regulatory Measures’ (公司债券发行与交易管理办法) by the China Securities Regulatory Commission in 2015.

According to data from Wind, during the period from the issuance of the old “Corporate Bond Issuance Trial Measures” (公司债券发行试点办法) in 2007 until 2014, a total of 1472 corporate bonds were issued, raising 874.4 billion yuan.

In 2015, the year following the promulgation of the new corporate bond law, a total of 1527 corporate bond were issued to raise more than 1 trillion yuan.

In 2016 alone a total of 2691 corporate bonds were issued, raising 2.7812 trillion yuan. While issuance levels dropped in 2017 to 1200 corporate bonds, the total amount raised was still above the trillion yuan threshold, at 1.1019 trillion yuan.

Li Yong (李勇), chief fixed income researcher with Northeast Securities, said to China Securities Journal that the exchange-traded market continued to play a supplementary role for the interbank market on China’s bond market, and is a main platform for corporate financing.

According to Li the exchange-traded bond market has actively promoted marketisation reforms over the past several years, simplifying the procedure for corporate bond issuance.

Other analysts point out that China’s exchange-traded bond market still suffers from impediments and flaws. 

“Within the near term, there will not be any exchange to the interbank market’s dominance of the domestic bond market,” said Pan Xiangdong, chief economist with Xinshidai Securities (潘向东)

“Looking at current conditions, the exchange-traded bond market still suffers from problems such as relatively small scale, comparatively inadequate liquidity, and low transfer and trusteeship efficiencies. Product innovation and system reforms also await further improvements.”

Li points out that the extreme strictness of exchange regulations means that the vast majority of corporate bonds “cannot circulate or be transferred.”

China’s secondary market for bonds is comprised of the interbank market and the exchange-traded market, and at present the interbank-market and the exchange-traded market are still two highly separated markets.

“The participants, transaction methods and settlement systems for both markets are quite different, which severely curbs the overall efficiency of the bond market.”

According to Xinhua members of industry are calling for “further increases in market liquidity, reductions in the cost of issuance, expanding the scale of bond funds, effectively guiding individual bond investors to invest in the bond market via methods such as bond funds, and raising the level of activity on the exchange-traded bond market.”

Members of industry also want regulators to “allow companies with low credit ratings to issue bonds, appropriately develop the high-yield bond market, help small and medium-sized companies with low credit ratings to resolve financing difficulties, and the accelerated formation of a multi-tier exchange-traded bond market on which yields and risk correspond.”

The Chinese central government is currently pushing for the percentage of direct financing in the country’s bank-dominanted financial system to be expanded, amidst ongoing efforts to curb risk, raise efficiency and reduce debt levels.

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