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Bai Weiqun: Pushing Forward the Construction of Free Trade Zone Bond Market and the Development of Shanghai International Financial Center

Pushing Forward the Construction of Free Trade Zone Bond Market and the Development of Shanghai International Financial Center

Bai Weiqun, Chief Supervisor of CCDC

Lujiazui Forum, Shanghai, June 21, 2017

1. The symbol of success in opening and innovation of the Shanghai Pilot Free Trade Zone will be the completion of construction of international financial center that is in accordance with China’s national financial strategy and serves the needs of China’s real economic development.

This shall be the mandate of the free trade zone. The nature of financial strategy of a great power consists of three elements: openness, ownership and stability. In terms of openness, we need to not only attract more foreign capital, but also advocate our rules. On the one hand, we should develop more investment instruments to draw capital inflows. On the other hand, with more self-confidence in our country and in our system, we need to push forward the institutional innovation and opening so as to provide China's solutions to global agenda. Indeed, China has developed its own institutional advantages in certain areas of financial development, and we have every reason to advocate them. As Governor Zhou Xiaochuan pointed out in his opening address, opening up will change and improve China's financial sector. My take is, the world will change with China's financial sector’s opening. By talking about ownership, I want to emphasize the importance of pricing power. One of the nuclear parts of a nation’s financial power is to have its financial pricing power, which should be high on the agenda of the opening of the free trade zone, particularly through institutional arrangements and institutional innovations. As of the last element, stability, I think only when we close monitor the financial risks in the course of opening up and foster the inherent stability mechanism in the course of promoting innovations, can the construction of free trade zone fare steadily and successfully.

The development of the real economy asks for a profound opening and innovation of the free trade zone in both breadth and depth. There are a variety of international financial centers, some of which are of special features focusing on specific areas, while some others are poised to become all-round international financial centers. The opening and innovation of Shanghai Pilot Free Trade Area is aimed to promote the construction of Shanghai into an all-around international financial center. In addition to active equity markets and debt markets, we also need to have a deep fundamental market and a flexible derivatives market, which face both the domestic and foreign issuance and investment entities, and serve the real economy with financing, capital, assets and information in a versatile manner.

2. The development of the free trade zone bond market is an important vehicle and element of opening and innovation of Shanghai Pilot Free Trade Zone.

The free trade zone bond market is not an isolated market. It is tightly integrated into China’s domestic bond market, and closely connected with offshore RMB market. The bond market is the underlying market, core market and benchmark market of China's financial system. In terms of volume, the total capitalization of the bond market has exceeded 70 trillion yuan, compared with about 53 trillion yuan of China’s equity market. In terms of the financing functions, the total social financing in 2016 increased by 17.8 trillion yuan, of which the direct financing accounted for 24% --specifically, 17% by the bond financing, 7% by the equity financing. In terms of openness, China’s equity market has made some moderate progress in opening up through the Shanghai-Hong Kong Stock Connect Program and Shenzhen-Hong Kong Stock Connect Program, whilst the bond market has been fully opened to the global investors since 2016, absorbing 800 billion yuan of global capital inflows, multiple times of that of Stock Connect Programs.

The development of the free trade zone bond market will add more momentum to the development of China's overall bond market. Free trade zone is the test field for the integration of China’s rules and international practices with respect to registration system, information disclosure, and mutual recognition of accounting standards, etc. Free trade zone bond market needs to gather global issuers and investors, become an important node connecting the onshore and offshore markets, and widen the foreign RMB circulation channels to promote the internationalization of the RMB. The development of the free trade zone bond market shall coordinate in depth with the "Belt and Road” Initiative by promoting participation of global capital to the Initiative and providing adequate risk management measures.

3. The construction of a domestic offshore market could be a viable development path for the opening and innovation of Shanghai Pilot Free Trade Zone.

In 1981, in order to improve the competitiveness of its local financial markets, the United States established in New York a series of domestic offshore facilities, namely International Bank Facilities (IBS), which encouraged international financial institutions to expand their lending business of international US dollar within United States. These facilities proved to be an effective tool for attracting the US dollar back and improving offshore dollar management. Japan introduced similar facilities in 1986, called Japan Offshore Market (JOM), which encouraged financial institutions to conduct European yen bond issuance and European yen lending business within Japan. This initiative played an important role in the process of yen internationalization. Though different countries vary in their development background and paths, their success arrangements concerning deregulation, tax incentives, account isolation and other issues warrant our further research. When discussing the development and innovation of the free trade zone, it is very important to consider the suggestions of building an offshore market as it can release more policy space. Since the vitality and momentum of Innovation and opening come from the market itself in the end, giving more policy space to the market participants may be the best policy.

4. The development of free trade zone bond market will act as bridges among "free trade zone", "Belt & Road Initiative" and "financial opening up".

China Central Depository & Clearing Co., Ltd. (CCDC) is the core pivot of China's bond market, the cornerstone efficiently supporting the gigantic flows of financial elements in the bond market, the important platform for national monetary policy and fiscal policy implementation, and one of the central hubs of national financial information. Keeping in mind its mandates, the CCDC has made some solid progress in exploring ways to support the construction of Shanghai International Financial Center. In the future, CCDC will keep a foothold in Shanghai Pilot Free Trade Zone and serve the global RMB bond market by deepening its four major functions, namely the cross-border issuance center of RMB bonds, the cross-border settlement center, Chinabond Pricing Center, and CCDC Collateral Management Service Center.

1) Cross-border issuance center. CCDC is China's largest direct financing platform. In 2016, the company supported the bonds issuance of 14 trillion yuan. Since its inception, CCDC has supported the issuance of 21 trillion yuan of Treasury bonds, 11 trillion yuan of local government bonds, 25 trillion yuan of policy bank financial bonds, 4.5 trillion yuan of corporate bonds. This core function of CCDC needs to be brought into full play in the free trade zone, serving both domestic and foreign issuers and investors and raising funds for domestic use or for "Belt & Road" Initiative projects. As RMB capital is a scarce resource, the cross-border issuance platform will be able to guide the global RMB capital back, not only to support implementation of the national "Belt and Road" strategy, but also to help Shanghai’s evolving into the RMB asset allocation center.

2) Cross-border settlement center. The settlement supported by CCDC in 2016 amounted to about 1,000 trillion yuan, accounting for about one-third of the total settlement volume through PBC's High Value Payment System. Thanks to China's bond market’s opening up, as of now, nearly 500 institutional investors have opened accounts and signed settlement agreements with CCDC, including about 50 central banks and sovereign wealth funds, as well as World Bank, International Monetary Fund and other important institutions. CCDC’s building of cross-border settlement center will definitely provide a boost to Shanghai’s efforts to build the RMB payment and settlement center.

3) Chinabond Pricing Center. It is in the bond market that some most important benchmark prices of the financial system are formed, especially the Treasury bond yield curves. CCDC was commissioned by the governing authorities to prepare China's Treasury bond yield curves, of which the three-month Treasury bond yield curve was included by the IMF SDR basket calculation as the benchmark interest rate for the RMB. The relocation of CCDC’s Chinabond Pricing Center to Shanghai will definitely support Shanghai’s construction as RMB pricing center by publishing the benchmark prices of the bond market locally and influencing the prices of global RMB markets. We all know that China’s A shares have just joined the MSCI Emerging Market Index, which marks a milestone of China’s markets winning the international recognition. With the opening up of the Chinese bond markets, China's own indices need to go global to provide the world with the investment benchmarks of the RMB bond markets. I think this is a more important topic.

4) CCDC Collateral Management Service Center. Bond by its liquidity and stability nature is the best financial collateral. Currently, 90% of the global financial collateral is in form of bond. Nearly all of China's sovereign, quasi-sovereign bonds are deposited in CCDC, which can serve as the best financial collateral. CCDC Collateral Management Service Center, the largest financial collateral manager in the world, takes control of over 12 trillion yuan of financial collateral, and has been supporting the controlling of the base money, the treasury cash management and the daily operation of the financial market. It will serve as a valve of liquidity flow and an operating panel of risk control management in China’s financial system. The center is based at Shanghai and will help Shanghai make a steady and remarkable progress in its International Financial Center construction.


    Publish on :06/22/2017 10:12
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