the chinese government bond market: opportunities and challenges

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The Chinese Government Bond Market: Opportunities and Challenges. S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and Banking University of Hawai’i The CSRC/OECD Second International Roundtable on the Chinese Securities Market June 6-7, 2002, Shanghai, China. - PowerPoint PPT Presentation

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  • The Chinese Government Bond Market: Opportunities and Challenges

    S. Ghon Rhee, K. J. Luke Distinguished Professor of International Finance and BankingUniversity of Hawaii

    The CSRC/OECD Second International Roundtable on the Chinese Securities MarketJune 6-7, 2002, Shanghai, China

  • Idiosyncratic Features of the CGB Market (I)

    1.Benchmark Interest Rates a. Deposit interest rates are serving as benchmark?b. Deposit interest rates are one of the last set of interest rates under controlc. Why very little differences are observed between savings bonds and book-entry bond yields?Savings Bonds:Syndicated Underwriting Book-Entry Bonds: Uniform Price Auction Method

  • Chart1

    488.4

    259

    14.7

    Bond Issues in 2001 (Billion RMB)

    T-BondsRMB 488.40 (64%)

    F-BondsRMB 259.00 (34%)

    E-Bonds RMB 14.70 (2%)

    Sheet1

    Government Budget change (%)

    Government Bond Issues

    Sheet1

    7.259.83

    10.610.5

    24.8524.05

    19.9824.78

    19.6317.8

    18.6816.32

    16.7816.33

    14.1616.94

    15.8822.13

    17.0520.46

    Revenue Change (%)

    Expenditures Change (%)

    Government Budget change (%)

    Sheet2

    7.259.83

    18.6221.36

    48.150.55

    77.6987.86

    112.57121.29

    152.28157.41

    194.61199.45

    236.33250.17

    289.74327.66

    356.19415.16

    Revenue Accumulative Change (%)

    Expenditures Accumulative Change (%)

    Government Budge Change (Accumulate %)

    Sheet3

    488.4

    259

    14.7

    Bond Issues in 2001 (Billion RMB)

    E-Bonds RMB 14.70 (2%)

    F-BondsRMB 259.00 (34%)

    T-BondsRMB 488.40 (64%)

    1561.8

    853.45

    100.86

    Bond Balance in 2001 (Billion RMB)

    T-BondsRMB 1561.80 (62%)

    E-BondsRMB 100.86 (4%)

    F-BondsRMB 853.45 (34%)

    Chart2

    1561.8

    853.45

    100.86

    Bond Balance in 2001 (Billion RMB)

    F-BondsRMB 853.45 (34%)

    E-BondsRMB 100.86 (4%)

    T-BondsRMB 1561.80 (62%)

    Sheet1

    Government Budget change (%)

    Government Bond Issues

    Sheet1

    7.259.83

    10.610.5

    24.8524.05

    19.9824.78

    19.6317.8

    18.6816.32

    16.7816.33

    14.1616.94

    15.8822.13

    17.0520.46

    Revenue Change (%)

    Expenditures Change (%)

    Government Budget change (%)

    Sheet2

    7.259.83

    18.6221.36

    48.150.55

    77.6987.86

    112.57121.29

    152.28157.41

    194.61199.45

    236.33250.17

    289.74327.66

    356.19415.16

    Revenue Accumulative Change (%)

    Expenditures Accumulative Change (%)

    Government Budge Change (Accumulate %)

    Sheet3

    488.4

    259

    14.7

    Bond Issues in 2001 (Billion RMB)

    E-Bonds RMB 14.70 (2%)

    F-BondsRMB 259.00 (34%)

    T-BondsRMB 488.40 (64%)

    1561.8

    853.45

    100.86

    Bond Balance in 2001 (Billion RMB)

    T-BondsRMB 1561.80 (62%)

    E-BondsRMB 100.86 (4%)

    F-BondsRMB 853.45 (34%)

  • Status of T-Bonds Issued in 2001

    Unit: Billion yuan Assigned IssueTypeSecondary Market Amount

    Book-Entry 308.35 BondsInter-Bank Market 212.35Exchange Market 96.00

    Savings BondsOTC Market 180.00Total488.35

  • Idiosyncratic Features of the CGB Market (II)

    2.Multipartite Structure of Government Bond Markets a. Dual Supervisory Structure of Primary MarketT-Bonds and E-Bonds: MOFF-Bonds:PBCb. Tripartite Structure of Secondary MarketInter-Bank Market under PBCOver-the-Counter (OTC) Market under PBCExchange Market under CSRCC. Meaning of the OTC Market in China?

  • Trading Value of Government Bonds (1996-2001)

    Chart4

    077.5201300.86

    0.97358.2730.991287.61

    3.32605.99102.151554.08

    7.74530.09395.691289.05

    68.27415.751578.121473.37

    83.93481.564013.331548.76

    Spot Inter-Bank

    Spot Exchange

    REPO Inter-Bank

    REPO Exchange

    Sheet1

    Types of Assets held by Individuals as of 2001

    Government Budget

    Sources of Government Revenue

    Transaction Value

    Sheet1

    1255.1

    8051.3

    648.4

    867.8

    193.2

    221.6

    Bank Deposits8,051.3 (71%)

    Insurance193.2 (2%)

    Margin Deposits221.6 (2%)

    Stocks867.8 (8%)

    Cash1255.1 (11%)

    Bonds648.4 (6%)

    Sheet2

    293.71308.36-14.65

    314.95338.66-23.71

    348.34374.22-25.88

    434.9464.23-29.34

    521.81579.26-57.45

    624.22682.37-58.15

    740.8793.76-52.96

    865.11923.36-58.24

    987.61079.82-92.22

    1144.411318.77-174.36

    1339.521588.65-249.13

    Revenue

    Expenditures

    Deficits

    Government Budget (1990-2000) (Billion Yuan)

    Sheet3

    7.259.83

    10.610.5

    24.8524.05

    19.9824.78

    19.6317.8

    18.6816.32

    16.7816.33

    14.1616.94

    15.8822.13

    17.0520.46

    Revenue Change (%)

    Expenditures Change (%)

    Government Budget Change (%)

    282.197.83-57.8961.58

    299.027.47-51.0259.48

    329.696-44.557.15

    425.534.95-41.1345.55

    512.690-36.6245.74

    603.80-32.7853.2

    690.980-33.7483.56

    823.40-36.8578.56

    926.280-33.3594.67

    1068.260-29105.15

    1258.150-27.88109.25

    Taxes

    Revenue from Enterprises

    Subsidies to SOEs

    Other Revenue

    Sources of Government Revenue (1990-2000)

    282.197.83-57.8961.58

    299.027.47-51.0259.48

    329.696-44.557.15

    425.534.95-41.1345.55

    512.690-36.6245.74

    603.80-32.7853.2

    690.980-33.7483.56

    823.40-36.8578.56

    926.280-33.3594.67

    1068.260-29105.15

    1258.150-27.88109.25

    Taxes

    Revenue from Enterprises

    Subsidies to SOEs

    Other Revenue

    Sources of Government Revenue (1990-2000)

    282.197.83-57.8961.58

    299.027.47-51.0259.48

    329.696-44.557.15

    425.534.95-41.1345.55

    512.690-36.6245.74

    603.80-32.7853.2

    690.980-33.7483.56

    823.40-36.8578.56

    926.280-33.3594.67

    1068.260-29105.15

    1258.150-27.88109.25

    Taxes

    Revenue from Enterprises

    Subsidies to SOEs

    Other Revenue

    077.5201300.86

    0.97358.2730.991287.61

    3.32605.99102.151554.08

    7.74530.09395.691289.05

    68.27415.751578.121473.37

    83.93481.564013.331548.76

    Spot Inter-Bank

    Spot Exchange

    REPO Inter-Bank

    REPO Exchange

    Transaction Value

    077.5201300.86

    0.97358.2730.991287.61

    3.32605.99102.151554.08

    7.74530.09395.691289.05

    68.27415.751578.121473.37

    83.93481.564013.331548.76

    Spot Inter-Bank

    Spot Exchange

    REPO Inter-Bank

    REPO Exchange

  • Idiosyncratic Features of the CGB Market (III)

    3.Secondary Markets: Money Market rather than Bond Market Inter-bank Market: REPOs are bond collateral loans among banksExchange Market: REPOs are short-term loansamong securities companies Money Market in China has been developed without T-Bills and the financing function for corporate working capital is missing the working capital needs of corporations Financing the working capital needs of corporations

  • Idiosyncratic Features of the CGB Market (IV)

    4.Missing Links in the Market a. T-Bills: Maturity Structure of Bonds Issued in 20012 years: 4% of total issues3 years: 34%5 years: 21%7 years: 14%10 years: 16% 15 years: 3%20 years: 8%b. Interest Rate Risk Hedging InstrumentsBond Futures: Banned in 1995 Short-term Interest Rate Futures: Not Available

  • Idiosyncratic Features of the CGB Market (V)

    4.Missing Links in the Market-Continued c. Foreign Participation in Primary and Secondary Marketsd. Asset-Backed and Mortgage-Backed Securities e. Municipal Bonds Revenue Source: 1/2 from Municipal Governments Expenditures: 2/3 by Municipal Governments

  • Recommendation 1: Benchmark Interest Rates

    Make T-Bond Yields Serve as Benchmark Interest Rates

    a. Stop MOFs practice of setting a range of bidding spreads at the primary market auctionb. Introduce T-Billsc. Create Balanced Maturity Structured. Make all T-bond issues fungible

  • Multipartite Structure of Government Bond Markets

    A Comprehensive Plan for the Government Bond Market Development Will Be Useful to Eliminate Multipartite Structures in Primary and Secondary Markets

    a.Regulatory Harmonization and Functional Delineation among PBC, MOF, and CRSC b.Consolidation of PBCs Primary Market for F-Bonds and MOFs Primary Market for T-Bonds and E-Bondsc.Consolidation of Inter-Bank Market and Exchange Market

  • Recommendation 2: Consolidation of Primary Market

    Under the current structure, PBC does not serve as ears and hands of MOF.a. PBC as the Fiscal Agent for All Government Bonds?b.CSRC as the Market Regulator for Both Primary and Secondary Market?c.Clearing & Settlement by PBC: DVP for All Government Bonds d.Fungible Issuese.Regularity of Issue Cycle

  • Recommendation 3:Consolidation of Tripartite Secondary Market

    Mere functional integration cannot achieve consolidation of three markets into a single marketa. Inter-bank market will remain as money market because commercial banks dont have incentives for spot market transactions b. Exchange market has limitations because automated trading system can not offer pre-trading negotiations and personal relationships among bond dealersKoreas Experience c. OTC market should trade book-entry bonds (not savings bonds) with all type

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