2018 is the first year of the full implementation of the spirit of the 19th National Congress of the Communist Party of China and the National Financial Work Conference and is also the 40th anniversary of reform and opening up. As the Chinese economy is moving into a new era of quality development, promoting the high-quality development of the government bond market is not only an urgent requirement of the new era and but also an inherent need of the market. As one of the core financial infrastructures, CCDC has been committed to consolidating the foundation of the reform and development of the government bond market and achieving a comprehensive improvement in safety and efficiency. Here, I will share some experiences with you.
CCDC actively supports the innovation and development of the government bond market
With the support of the governing authorities, CCDC is unswervingly committed to the policy implementation, market operation, and reform and innovation of government bonds.
First, support the effective implementation of fiscal policies. By adapting to the large-scale, high-frequency and diversified issuance requirements and by improving its business and systemic capabilities, CCDC in 2018 has supported the issuance of government bonds of more than 7 trillion yuan, with a depository balance standing at 32 trillion yuan. CCDC has been supporting the issuance innovation including Treasury bond maturity management, rolling issuance, additional issuance, pre-issuance and Treasury bond market making mechanism. The Company has built a strategic analysis system for debt management; it supports innovations of local government special bonds; it supports central and local Treasury cash management; it actively conducts the first-line monitoring function, providing multi-dimensional data and analytical support.
Second, support the safe and efficient operation of the government bond market. Since its inception, CCDC has been sticking to the mission of building a unified bond depository system. It provides full-lifecycle services for government bonds, including issuance, registration and depository, trading and settlement, interest payment and redemption, information services, collateral management, etc.; it fulfills the duties of the central depository of government bonds, supporting the unified cross-market issuance and trading of government bonds; it focuses on the construction of a multi-level government bond market system, and, in cooperation with CICC, provides a DVP mechanism for the physical delivery of Treasury bond futures, which promotes the development of the interaction between Treasury cash bond market and futures market; it cooperates with Treasury Bond Association to jointly maintain the stable and healthy development of the government bond business.
Third, promote the deepening of the financial function of government bonds. CCDC designs and upgrades a series of Treasury bond yield curves with the aim to deepen the pricing function of Treasury bonds. In 1999, CCDC developed the first bond yield curve. Today, the series has expanded into a pricing product system consisting of eight categories and covering multiple assets. These government bond market indicators are increasingly attracting policy attentions and inspiring market applications. The company also provides automated collateral management services, expands the use of Treasury bonds as pledge, and promotes the roles of government bonds in performing risk management and liquidity management functions.
Fourth, foster the government bond retail market. CCDC developed a book-entry Treasury bond OTC system in 2002 and started the system support of savings Treasury bonds (electronic) in 2009. The Company posts advertisements on CCTV publicizing OTC savings Treasury bonds; it actively promotes the expansion of OTC Treasury bond varieties and OTC handling institutions; it has recently provided basic support for the OTC trading of local government bonds. At present, there are more than 20 million participants in the OTC market, and the retail base of government bonds keeps expanding, which has promoted the inclusiveness of public services.
Fifth, serve as a major channel of government bond research. CCDC actively conduct forward-looking researches on government bond market. It undertakes international technical assistance projects and carries out research and consultancy on the secondary market construction of Treasury bond, strategic econometric analysis of Treasury bond, construction of local government bond market, study of space for local government bond issuance, and the management of optimal level of Treasury cash reserve, etc.; it cooperates with competent authorities to conduct research on innovation of the Treasury bond issuance mechanism, OTC market construction, overseas purchase of RMB government bonds, interaction of cash bond and futures markets, and Treasury cash management, which have contributed to the institutional construction of the government bond market.
Sixth, facilitate the opening up of China government bond market. As a major promoter of opening up government bond market, CCDC has continuously enhanced its international service capabilities and strengthened its global engagements. It has been actively exploring the free-trade-zone issuance of local government bonds. As of the end of November 2018, the China government bonds held by overseas institutions in CCDC amounted to about 1.1 trillion yuan, accounting for more than 60% of the bonds held by overseas institutions. By doing this, the international reputation and influence of China's government bond market has been steadily enhanced.
Government bond market faces new requirements for high quality development
Since the resumption of Treasury bond issuance in 1981, China's Treasury bond market has been rapidly expanding and the maturity structure of Treasury bond been greatly enriched. Since the trial of local government bond issuance in 2009, the market scale has continued to expand, the degree of marketization steadily increased, and related regulations and rules seen continuous improvement. This market is moving towards a much more developed stage.
The report of the 19th National Congress of the Communist Party of China pointed out that national economy has shifted from a high-speed growth stage to a high-quality development stage. To my understanding, the high-quality development of the government bond market in the new era may include many aspects. I will elaborate some here.
The first is to moderately increase the issuance of government bonds. In a mature financial market, the Treasury bond market serves as a cornerstone, and the yield curve of government bonds is the barometer of economic and financial performance. Compared with the international average, China's Treasury bond market has a good room for growth, both in its proportion of GDP or its proportion of the whole market of bonds. At the same time, the guideline of “steady growth, structural adjustment, and risk prevention” also calls for support from new government bond issuance. Local government bond also sees some cases for a proper and necessary growth.
The second is to continue to enhance the liquidity of the secondary market. A government bond market with sufficient depth and liquidity is the basis of pricing and liquidity management in the financial market. In terms of turnover rate and other indicators, the liquidity of China Treasury bond market has improved significantly in recent years, though, compared with the level of developed countries, the level of market activity is still relatively low. The liquidity of local government bond has improved since the second half of 2018, but there is still some room for improvement.
For the Treasury bond, we need to improve the issuance strategy, implement the Treasury bond ceiling management, coordinate issuance batches, and increase the proportion of short-term bond issuance; we need to stimulate the willingness of market making of the Treasury bond, and gradually expand the investor base of the Treasury bond futures; we need to improve the micro-mechanism of interest rate liberalization, and promote the sophisticated application of the bond yield curves; we need to support innovations in repurchase and bond lending, and improve the efficiency of the use of Treasury bond as high-quality collateral.
For the local government bond, it is necessary to improve single-stage scale management, increase the concentration of special bonds, and shorten the period of initial issuance; continue to expand the investor base, promote local government bond counter business, and expand sales channels for small and medium-sized institutions and individual investors. In particular, it encourages individual investors in the region where the issuer is located to purchase; continue to broaden the use of local government bond, moderately reduce the discount rate in policy operations; study the capital provision for local government bond investment to reduce the rules and improve the organization's configuration needs.
The third is to continue to promote the integration of infrastructure. To some extent, the level of construction of the CSD reflects the competitiveness of a country's capital market. Since the late 1980s, unified central depository system has become an international standard. At the beginning of this century, developed countries completed the historical transfer to unified central depository systems. After the global financial crisis in 2008, some major developing countries also accelerated the integration of CSDs. Currently, among more than 100 countries in the world, only China and India have more than three central depositories at the national level. Since 2005, China government bonds have been issued and traded across markets, and the efficiency of interconnection of government bonds is highest among all bond varieties. The next step is to promote the effective allocation of financial infrastructures, promote the unification of bond infrastructure, expand interconnection, secure integrated development, and to continue to make the market bigger.
The fourth is to steadily expand the opening up of the bond market. Thanks to China's stable economic growth, prudent macroeconomic policies, and basically stable RMB exchange rates, foreign investors continue to invest in China's bond market, and their most preferred choice is Treasury bond. The intensive cross-border use of RMB bonds is an indispensable part of the development of RMB from a settlement currency to an investment and reserve currency. The opening up of the RMB bond market, especially the opening of Treasury bond market, has improved the portfolio return and asset allocation efficiency of overseas investors, and provided a group of quality public investment products for the whole world, which is conducive to the stability of the global financial system.
Further enhance ability to serve the government bond market
The CCDC will adhere to the mission endowed by the state, stick to its financial infrastructure mandates, provide safe, efficient and professional bond services for global investors to participate in the Chinese bond market, and unswervingly support the Chinese bond market to move toward a high-quality development stage.
First, enhance the ability to serve the real economy. As the backbone supporting the efficient operation of the bond market, CCDC is a key link in increasing the proportion of direct financing and servicing the real economy. In the next step, the Company will continue to strengthen itself, continuously develop the platform functions of direct financing services and macro policy services, support market innovation, and improve the efficiency of the bond market in serving the real economy.
Second, improve the ability of risk prevention and control. Preventing systemic risks is one of the main lines of financial work in the future. CCDC will improve the market risk monitoring indicator system while strengthening internal risk management, and strengthen risk management tools such as statistical monitoring, collateral monitoring and information services. By doing so, CCDC is trying to provide a systematic plan to prevent market risks and to maintain long-term stability in the market.
Third, foster the capability of facilitating financial reform and opening up. Pushing forward opening up of bond market in a more and more complex global environment requires adept maneuver capability. In the next step, CCDC will continue to improve its international services, promote cross-border collateral applications, promote cross-border bond index investment, and construct R&D think tank platforms, and actively respond to the new-era demands of interest rate liberalization and RMB internationalization.
The development of the government bond market in the new era requires the joint efforts of all parties involved. CCDC will work with all parties to embrace a new era, start a new journey and build a new landscape. (This article is based on the author's keynote speech at the “Seminar on High-quality Development of Government Bond Markets”)