Promoting High-quality Development
and Embracing the New Era of the Bond Market
Bai Weiqun, Chief Supervisor of CCDC
ChinaBond Annual Conference, Shanghai, Jul 19, 2018
This year marks the 40th anniversary of reform and opening-up. China’s bond market has registered impressive achievements. Core constituent of the financial market, major channel for direct financing and a key gateway for opening-up, the Chinese bond market is playing an increasing role. With outstanding bonds topping 70 trillion RMB, the Chinese bond market as now the world’s third largest is anticipated to overtake the second, exerting growing global influence. As the Chinese economy ushers in a new era of high-quality development, promoting the high-quality development of the bond market becomes not only the immediate call of the times, but the intrinsic need of the market as well. Here I wish to share some of my own understandings.
Developing innovatively to serve the transformation and upgrading of the real economy
This is the footing of the financial sector. Only a bond market that is dedicated to serving the real economy and always prioritizes innovation could be a bond market of high-quality development. Therefore, we should advance the supply-side reform of the bond market by making breakthroughs in major weak links, and thus give new impetus to economic growth.
First, we should take multiple measures to promote the asset securitization market. Currently, rapid development is seen in the asset securitization market, but constraints still remain. As regulation tightens up, more off-balance-sheet financing are transferred onto the balance sheet. Be it for strengthening the ability to serve the real economy, or for diversifying and dissolving risks, we need to further break through the development bottleneck facing asset securitization.
To this end, we can upgrade the quality of ABS development from four dimensions: compliance, standardization, transparency and convenience. In terms of compliance, while proactively expanding the scope of ABS, we should closely guard against risks by meeting the bankruptcy requirement and clearly delineating the eligible types for ABS assets and structures, so as to avoid “indiscriminate securitization” where the bad mingles with the good. In terms of standardization, we can standardize products and regulate market access in the areas of asset class, maturity, income distribution, information disclosure, etc. Many innovative products lack product specifications and innovation standards, and seem to have merely drawn inspiration from the rudiments of other countries’ practice in their different stages. For example, a single bond element such as interest calculation can be subject to multiple standards. This causes considerable inconvenience to issuers and investors, and poses obstacles to pricing and the liquidity of the primary and secondary markets. In terms of transparency, we can encourage ABS sponsors to disclose information of underlying assets to investors and third-party valuation agencies, so as to facilitate risk pricing, increase transparency and thus add to liquidity. In terms of convenience, by learning from the international experience in Mortgage Electronic Registration System (MERS) and taking account of China’s conditions, we can have national financial market infrastructures (FMIs) establish a central mortgage rights registration system for securitization purpose, which registers ownership and alienation of mortgage rights. With this system, transfer of mortgage rights can be genuinely realized pursuant to stipulations in the real rights law, so legal risks are reduced, procedures streamlined and operational cost lowered.
Second, we should create favorable conditions for the market development of high-yield bonds, or lower rating credit bonds, so to speak. The bond market is supposed to deliver inclusive services, but now lower rated credit bonds meet difficulty even with issuance. This has crippled the bond market’s function to serve the real economy, and accumulated many risks. Developing the high-yield bond market is conducive to the inclusiveness of the bond market. Currently, financial institutions are subject to hard-and-fast rules which only allow them to invest in bonds rating AA+ and above, with lower rated credit bonds excluded. As a result, issuance ratings are often falsely high, crowding out issuers with even slightly lower rating or performance. In case of rating adjustment, sell-offs can be triggered to destabilize the market. This year, much public attention has been focused on default incidents. Ratings have been adjusted rather frequently. Market implied ratings, which are released by ChinaBond Pricing Center on a daily basis, are quite timely and objective, because they are calculated according to changes in market prices. A remarkable change usually would have manifested itself in the ChinaBond market implied rating 100 days on average before the credit rating was revised down. As such, ChinaBond market implied ratings play a rather good role as early warning, and should be paid close attention to.
Bond investment decisions are made by the market according to risk and return balance, but market decision sometimes can be distorted and immoderate and needs to be rectified. We appeal to competent authorities and main market institutions to work to promote the investment in lower rated credit bonds. We suggest that, for the proprietary business and mutual asset management products of financial institutions including banks and insurance companies, rating requirement be set for the whole portfolio, while for individual bonds the requirement be loosened. Needless to say, default management mechanism should be put in place and corporate restructuring efficiency should keep up. In this regard, we also hope Shanghai Financial Court can push ahead and make some real breakthroughs.
Third, we should devote major efforts to propel the green bond market development. Currently, China’s green bond market has the largest volume of outstanding bonds and the most diverse types of issuers. Compared to other bonds, however, issuance of green bonds requires greenness assessment or verification, which has increased overall issuance cost and held back market expansion.
To motivate issuers and enhance the micro-foundation for green development, we should set uniform and normalized environmental information disclosure criteria, and decide whether it should be made compulsory for all issuers with public bond offerings to disclose information. Of course, disclosure requirement should advance in due order, allowing for the process of gradual adaptation and improvement.
Increasing efficiency by accelerating the integration and unification of FMIs
Safety and efficiency are eternal themes of market development. The history of the bond market is a history of improving safety and efficiency with reforms. Currently, from size, varieties to investor base, China’s bond market shows an overall good momentum for development, when compared with other capital markets around the globe. However, the fragmentation among financial market infrastructures, especially CSDs, is a marked weakness, and can even become an Achilles’ heel of our market opening-up and development.
At the international level, there is a clear trajectory towards CSD integration. Since the late 1980s, a unified central depository system has become an international standard. Up to the early 2000s, developed countries have already finished the historical task of unifying CSDs. US has integrated the functions of its seven CSDs under DTCC, except for retaining treasury bond book-building in its payment system, and Japan has taken a very similar path. Canada has amalgamated its regionally fragmented depository and settlement functions into one single CSD. France and Germany have both established a single CSD since the beginning. UK has amalgamated three CSDs into one, while Italy two into one. After the financial crisis, major developing countries also sped up integration. Russia has integrated seven CSDs into two, and finally established one single CSD by legislation in 2013. Lately, Brazil have fixed the CSD fragmentation problem by setting up a financial market infrastructure conglomerate. Among over 100 countries in the world, only China and India run more than three CSDs, which is quite a rare arrangement. To plan financial market infrastructures as a whole is a requirement by the CPC Central Committee. As I understand it, the kernel of overall planning is to enhance the construction of financial market infrastructures in line with market rules, rather than the mere considerations of division of regulatory responsibilities.
Product of reform and opening-up, the CSD system is now in turn crucial vehicle for deepening reform and opening-up. The level of CSD system somewhat reflects the competitiveness of a country’s capital markets. Countries of the world have been working on the integration of CSDs and other FMIs as a strategic priority. The Chinese bond market calls for improvement not only in quantity, but also in quality and efficiency. Facing the downward pressure, complex external environment, expanding financial opening-up, among other new situations, we should attach even more importance to financial market infrastructures, among which, the CSD system should fulfil its inborn duty as financial mainstay of a nation.
Therefore, we appeal to accelerate the integration and unification of financial market infrastructures and promote centralized depository for the bond market. This will help nurture a unified bond market where technical barriers are removed, price discovery efficiency increased, market operational cost lowered, and regulatory efficacy enhanced. This will also facilitate overseas investors’ market access and thus advance the market opening-up.
Optimizing services to support orderly, efficient opening-up of the bond market
Recent years, one highlight of the Chinese bond market is its opening-up. Attracted by favorable factors including steady economic progress, prudent and moderate macro policies, basically stable RMB interest rate and spreads, overseas investors have sped up their pace entering the Chinese bond market. Up to the first half of 2018, the value of onshore RMB bonds held by overseas investors has topped 1.5 trillion RMB, among which, overseas holdings account for more than 7% of outstanding treasuries.
In line with the general trend of the bond market opening-up and under the guidance of competent authorities, CCDC has been proactively providing basic services in support of the opening-up. First, we provide overseas institutions with abundant market and business information. Our team has toured major global financial centers introducing the Chinese bond market, holding overseas investor annual conferences, and participating in international expos, etc. Meanwhile, we have enriched the English content on our official website, www.Chinabond.com.cn, completed the English version of our service information, and familiarized more than 200 international institutions with the ChinaBond pricing and index system. Second, we have facilitated system operation by developing an English client terminal dedicated to overseas institutions, extending settlement cycle, making coordinated adjustment to support the High-Value Payment System’s extension of service hours, and getting connected with the global network of SWIFT. Third, we have facilitated the cross-border use of RMB assets. CCDC Collateral Management Service Center is now the world’s largest bond collateral management center with 14 trillion RMB of collateral under management. We have been promoting cross-border use of bond collateral and have had successfully cases in cooperation with Bank of China and Industrial and Commercial Bank of China. Fourth, we have made progress in researching and developing matching institutions. We conducted coordinated research with competent authorities on tax services and participated in the design of the withholding tax arrangement for overseas institutions. We have developed and made technical preparations for Bond Connect to apply the safe and efficient DVP mechanism. We have also researched and proposed to open up onshore risk hedging instruments to overseas institutions. Fifth, we have conducted continuous research on cross-border interconnectivity. By interconnecting with international financial market infrastructures, we can establish win-win cooperation with domestic and foreign intermediaries as a host to share the benefits brought by the rise of the RMB bond market.
After a period of nurturing and accumulation, the company has registered progress in servicing overseas investors. A landmark in the Chinese Bond Market Opening-up, the No. 3 Announcement of People’s Bank of China expanded the market access for global investors. Ever since 2016, the CIBM Direct program has been giving overseas investors direct access to the market. Up to date, a total of 688 overseas institutions have opened accounts at CCDC under CIBM Direct, with bond holdings of more than 1.3 trillion RMB. Both the number of overseas institutions and the value of their bond holdings have taken up more than 90% of overseas investors in China’s bond market. In 2017, under the guidance of competent authorities, CCDC has also proactively provided services to overseas investors to indirectly enter CIBM via Bond Connect. Up to date, a total of 131 overseas investors have opened accounts at CCDC under such mode, with bond holdings of some 50 billion RMB. Overseas institutions who prefer CIBM Direct are mainly experienced medium to large international investors, including foreign central banks, sovereign funds, international organizations and commercial institutional investors, etc., with an average account balance of 20 billion RMB, while those who prefer Bond Connect, small to medium investors, and 400 million RMB.
To further align itself with the national financial strategy, CCDC assembles the five platforms of core function in its Shanghai Headquarters, i.e. cross-border bond issuance center, cross-border bond settlement center, CCDC Collateral Management Service Center, ChinaBond Pricing Center Co., Ltd. and Shanghai Data Service Center, as an effort to complete Shanghai’s financial market system and service the global RMB bond market.
All in all, no matter how the external environment changes, we shall act in accordance with market rules, do our own job and do it well. And that means, to continue to enhance the groundwork for the bond market, ensure the overall improvement in both market safety and efficiency, and enable high-quality development for the bond market. Only in this way can we stay on the right track for promoting reform and opening-up, and adapting ourselves to the new landscape of international financial governance.
(translated by R&D Department, CCDC Shanghai Headquarters)