CHINESE BOND MARKET 1
ChineseBond Market and Banking Systems
Chinese Bond Market andBanking Systems
TheChinese bond market is recognized as one of the largest and mostproductive worldwide. It has created several benefits for thecountry’s financial system. In fact, the Chinese economy has grownat a rate of over 10% (Pillai, Li, & Huang, 2013). Furthermore,it can enhance the health of the banking sector. A proper bond marketcan also provide funding to private enterprises. As the third largestmarket worldwide, the Chinese framework is valued at $4.24 trillionor RMB 35.89 trillion (Pillai et al., 2013). The country’s bondmarket enhances the financial sector by allowing investors to acquirefunds.
Discussin detail how a more developed bond market can help improve theseaspects
Chinais served by two bond markets, namely, the Exchange bond market andthe Inter-bank bond market. The latter is regulated by thegovernment-instituted People’s Bank of China (PBoC) while theformer is controlled by China Securities Regulatory Commission (CSRC)(Pillai et al., 2013). The Exchange market is smaller than theInter-bank market since it accounts for less than 5% of the country’stotal trading volume (Pillai et al., 2013). The Ministry of Financeissues bonds designed to fund government expenditure. The PBoC alsoissues short-term securities to implement monetary policy. Commercial and policy banks such as the Agriculture Development Bankof China (ADBC) and China Development Bank (CDB) provide financialbonds that are credited by the national government (Pillai et al.,2013). Other instruments include medium-term notes and short-termfinancing bills.
Bondmarkets can improve China’s bond market by creating a reliance onbank loans and equity assurance. Many Chinese corporations utilizecapital from the government to finance their investments. Hence, thecountry’s authorities are incentivized to enhance the bond market.The government can also ensure that corporations raise funds byissuing bonds. China’s bond market also provides finance bydiversifying credit risk (Pillai et al., 2013). The banking systemprovides the majority of funds for investments in viable securities.
Inaddition, China’s bond market has grown due to infrastructuredevelopment. In particular, the country has improved its transportand communication networks. Hence, many business transactions occurthrough expedited processes. Also, advanced technology has made iteasier for investors to identify viable opportunities in thefinancial market. The banking sector has experienced tremendousgrowth through the increase in fiscal revenues (Pillai et al., 2013).The Chinese central government receives regular funding to financeits infrastructure projects.
TheQualified Foreign Institutional Investor (QFII) program permitsforeign investors to access both the Inter-bank bond market and theExchange bond market (Pillai et al., 2013). QFII was launched in20002 to provide a platform through which Yuan-denominated bonds andequities were traded. Stock exchanges in Shenzhen and Shanghaiallowed investors to trade in short-term and mid-term securities(Pillai et al., 2013). Previously, strict capital controls hinderedthe movement of assets into and out of the country. QFIIS weregranted access to the Exchange bond market in 2012 (Pillai et al.,2013). Consequently, investors can transfer certain amounts of moneyto qualified custodian accounts. QFIIS can also invest inCSRC-approved financial instruments, close-ended and open-endedfunds, publicly listed shares, and bonds traded on the Inter-bank andExchange markets.
TheChinese bond market has also led to the growth of the banking sectordue to the country’s sovereign credit quality. China has a lowdebt-to-GDP ratio that controls its ability to acquire funds (Pillaiet al., 2013). Therefore, many investors can obtain funds to financebusiness ventures. Chinese bonds provide higher yields than othermajor bond markets in Europe. Moreover, foreign investors can gainexposure to China’s currency acquiring government-issued bonds.Offshore institutions such as overseas banks, lenders in Macao, andforeign central banks allow investors to trade in the Inter-bank bondmarket. Most of these organizations have performed renminbi clearing(Ma & Yao, 2016). Funding sources in the bond market comprise ofcurrency cooperation between onshore RMB businesses, cross-bordertrades, and central banks. In this regard, investors can use directaccess to open trading accounts in the country’s Inter-bankclearing house (Pillai et al., 2013). The former may also appointqualified agent banks as proxies and instruct them to conductbusiness transactions.
Existinghurdles against implementing these aspects
Inmany instances, investors face several obstacles when trying toexploit China’s bond market. Firstly, the country’s strong growthrate does not benefit investors since they lack knowledge about theavailable range of bonds. Chinese markets in Shenzhen and Shanghaifoster secretive programs that make it hard for outsiders to conductbusiness (Pillai et al., 2013). Other restrictions are alsoimplemented to reduce the incidence of insider trading. In thisregard, foreign investors lack a reliable source of information whentrying to determine the best investments. Different bonds areprovided to serve several purposes. The government may wish tocontrol the amount of currency in the economy using open marketoperations. Funds may also be needed to finance particular nationalprograms (Fang, 2013). Investors who lack knowledge about theavailable types of bonds cannot maximize their revenues.Consequently, it is difficult to reap the full benefits accorded bythe Chinese bond market. This hurdle can be overcome by providingmore information on the available types of bonds. Investors should beable to access the details concerning different types ofopportunities in the stock market.
Besides,Chinese regulators impose restrictions on how investments can bemade. They also control the type of people who are allowed to investin financial markets. Some aspects of the country’s bond market arealso regulated (Pillai et al., 2013). Hence, it is impossible for thebond market to attain its maximum potential. Investors who fail tofulfill predetermined criteria are hindered from acquiring bankloans. The country’s domestic bond market does not permit foreigninvestors to retain shares and holdings. In fact, the funds of $115billion reflect only 1.9 % of the stock market (Ho, Tang, Tang, &Wei, 2015). Offshore investors are also obligated to navigate throughthe country’s investment programs before acquiring access to thefinancial markets. Therefore, minimal foreign participation limitsthe bond market’s capacity to attract foreign investments. Thishurdle can be solved by providing incentives to foreign investors.The central government can also endorse bond issuance and enactsupportive policies and regulations (Ma & Yao, 2016). Hence,investors can acquire low-cost finance from lending institutions.
Indeed,the Chinese bond market has enhanced the country’s economy bymaking it easier for investors to acquire capital from thegovernment. The country has created a financial system that relies onequity assurance and bank loans. Hence, many investors can acquirelow-cost finance from lending institutions. Furthermore, the countyhas several programs that allow investors to access the Exchange bondmarkets and Inter-bank bond markets. China also has a strongsovereign credit quality. In this respect, China can utilize its lowdebt-to-GDP ratio to acquire foreign investments. On the other hand,the country’s financial sector is adversely affected due to thelack of knowledge. Investors cannot ascertain the range of bondsissued by the national government. In addition, the centralgovernment determines the types of people who can make investments.The nature of transactions also depends on the requirements set up bygovernment agencies. Nevertheless, such obstacles can be overcome byeliminating restrictions and providing information on the range ofbonds.
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Ho, K., Tang, MK., Tang, H., &Wei, M. (2015). China’sdomestic bond market: The Next Financing Engine.Goldman Sachs Global Investment Research.
Ma, G., & Yao, W. (2016).Can the Chinese bondmarket facilitate a globalizing renminbi? FungGlobal Institute.
Pillai, S., Li, L., &Huang, H. (2013). FAQ:China’s Bond Market.Goldman Sachs Global Liquidity Management.