Debenture Bonds Will Remain Confined to Interbank Market: Chinese Central Bank

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The People’s Bank of China (PBOC) has indicated that trading of debenture bonds (信用债) in China will remain confined to the interbank market.

A PBOC expert said to its own official news publication that “debenture bonds cannot leave the interbank market” despite recent calls for their withdrawal.

“Some recent viewpoints opine that debenture bonds should withdraw completely from the interbank market – such viewpoints have not at all given full consideration to the unique features of the bond market and the developmental history and environment of the Chinese bond market,” said the expert.

“The interbank market is in actuality the bond market for institutional investors, and the issuance and trading of debenture bonds on [the interbank market] satisfies the objective laws and demands of bond market development.

“Exchange markets are primarily for retail investors, and are a weak match for the development demands of debenture bond markets.”

The PBOC expert further points out that banks are the main investors in debenture bonds in China at present, which is advantageous for a number of reasons.

“Enterprises issuing debt and seeking finance on the interbank market is of benefit to fully employing the capital advantages of banks, and their specialist advantages when it comes to the pricing of the risk of enterprise credit,” he said.

“This (enables) high-quality enterprises to finance at lower interest rates, as well as diffuse risk amongst institutional investors.

“Debenture bond markets are themselves more susceptible to fluctuations as a result of risk, and if we require that debenture bonds fully withdraw from the interbank market, this will directly lead to a sharp drop or even a disappearance in subscription demand from banks for debenture bonds, causing the bonds to succumb to stagnancy and interest rates to see major fluctuations, potentially triggering systemic financial risk.”

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