Financial Market Analysis in the First Half 2006

 

Abstract

This article is selected from the China Monetary Policy Report Q2 2006, issued on August 9, 2006 by the Monetary Policy Analysis Group of the People’s Bank of China. The first half of 2006 witnessed overall sound financial market performance, featuring sufficient liquidity in the money market, smooth bond issuance and brisk trading activities in the market. Financial market product innovation accelerated, and great progress in institution building and further improvement in operational mechanism were achieved.

 

An overview of financial market performance

In the first half of 2006, the financing structure of domestic non-financial institutions (including the household, enterprise, and government sectors) changed remarkably. In particular, debt financing by enterprise, especially short-term financing bills, expanded rapidly with the share of enterprise debt financing clearly rising; stock market traded briskly with the share of equity financing climbing modestly; the share of government securities and bank loans declined. In the first of half of the year, the share of bank loans, equities, government securities and corporate bonds in the total financing of the non-financial sectors was 86.8, 5.6, 1.4 and 6.1 percent respectively.

 

Table 1 Financing by domestic non-financial sectors in H1 2006

	Volume of financing (100 million yuan)		As a percentage of total financing（%）
	H1 2006	H1 2005	H1 2006	H1 2005
Financing by domestic non-financial sectors	25629	18089	100	100
Loans	22251	15882	86.8	87.8
Equities	1442	908	5.6	5.0
Government securities	361	996	1.4	5.5
Corporate bonds	1575	303	6.1	1.7

Source: Financial Survey and Statistics Department, the People’s Bank of China

 

Trading in the money market was brisk, and market interest rates gradually rebounded

 

In the first half of 2006, the turnover of bond repo in the interbank market climbed up remarkably by 3.93 trillion yuan over that of 2005 to 10.82 trillion yuan, and daily average turnover registered a year on year growth of 57 percent to 88.7 billion yuan. In particular, the turnover of bond pledged repo transactions totaled 10.67 trillion yuan, a growth of 3.87 trillion yuan over that of 2005, and outright bond repo transactions 147.9 billion yuan, an increase of 58.2 billion yuan from the same period last year. In terms of maturity structures of the bond pledged repo transactions, the market share of overnight products posted 46.8percent, 6.6 percentage points higher than that of 7-day products, reflecting an evident trend of shortening maturity in fund use. In the first half of 2006, the accumulated turnover of government securities repo on organized exchanges was 0.57 trillion yuan, down 58.9 percent year on year.

    

In the first half of 2006, interbank borrowing totaled 707.5 billion yuan, up 70.2 billion yuan year on year, representing a daily average turnover of 5.8 billion yuan with an increase of 11 percent compared with that in 2005. The lion's share was concentrated in two types of short-term instruments, i.e. 7-day and overnight products, with the market share of overnight products increasing by 9.6 percentage points year on year, and that of 7-day products declining by 11.l percentage points.

 

Table 2 Financial institutions’ net borrowing in repo and interbank lending in H1 2006

	Volume of financing (100 million yuan)		As a percentage of total financing（%）
	H1 2006	H1 2005	H1 2006	H1 2005
Financing by domestic non-financial sectors	25626	18089	100	100
Loans	22248	15882	86.8	87.8
Equities	1442	908	5.6	5
Government securities	361	996	1.4	5.5
Corporate bonds	1575	303	6.1	1.7

Source: “China Financial Market Monthly Statistical Bulletin”, People’s Bank of China

 

Money market interest rates gradually climbed. The monthly weighted average rate of bond pledged repo transactions and interbank borrowing registered 1.74 percent and 1.88 percent respectively in January, before experiencing a slight fall in February. Starting from late March, market interest rates rebounded gradually due to factors like stronger expectation of market interest rate hike, intensified open market operations, growing lending by financial institutions and recovery of financial function in domestic equity market. In June, the monthly weighted average bond pledged repo rate and interbank borrowing rate moved up to 1.87 percent and 2.08 percent respectively, the highest points since the cut of excess reserve rate in March, 2005, representing a gain of 0.52 and 0.5 percentage points respectively compared with the lowest points in February, and up 0.77 and 0.62 percentage points year on year.

 

With respect to net fund flows in the repo market, state-owned commercial banks were still the largest net fund providers through both bond pledged and outright bond repo transactions, with net lending in the first half year increasing 137 trillion yuan year on year t0 5.29 trillion yuan. Net borrowing by other commercial banks[①] declined to some extent over the same period last year, registering a year on year decrease of 327.3 billion yuan. Net borrowing by other financial institutions[②] and foreign financial institutions picked up, with a year on year increase of 1.40 trillion yuan and 0.30 trillion yuan respectively, suggesting an expanded fund demand. In the interbank borrowing market, other commercial banks were the largest net fund providers with net lending in the first half year increasing 9.4 billion yuan year on year to 215.8 billion yuan. Among net borrowers, the net borrowing by other financial institutions③ dropped largely due to evident decline in net borrowing by securities companies. The net borrowing by the foreign financial institutions accelerated.

 

Bond market expanded significantly and market operational mechanism improved further

 

Bond market traded briskly. In the first half of the year, the accumulated turnover of spot transactions tin the interbank bond market increased by 2.55 trillion yuan over the same period of the last year to 4.93 trillion yuan, while the daily average turnover soared by 1.1 folds year on year to 40.4 billion yuan. The turnover of government bond spot transactions on organized exchanges totaled 98.4 billion yuan, 39.4 billion yuan less than that recorded in the first half of 2005.

 

Bond indices in the interbank market and stock exchanges moved slightly upward. The bond index in the interbank market rose by 0.7 points, 0.62 percent, from 113.42 points at the beginning of 2006 to 114.12 points at end-June. The government securities index on the organized exchanges rose by 0.45 points, or 0.41 percent, from 106.19 points at the beginning of the year to 10109.64 points at end-June.

 

The yield curve of government securities in the interbank bond market shifted slightly upward, and the yield of medium- and long-term bonds displayed a clearly upward trend compared with the end of 2005. Performance of the yield curve can be divided intro two phases. First, in the first five months of 2006, higher yields of short-term bonds due to steady price decline and lower yields of long-term bonds due to price hike caused the entire yield curve to flatten; second, in June of 2006, affected by a series of adjustment measures, yields across the entire maturity spectrum edged up, causing the yield curve to shift steadily upward.

 

Financing activities were brisk in the primary bond market and market operational mechanism improved further. In the first half of 2006, a total of 995.9 billion yuan worth of bonds was issued, up 414.6 billion yuan or 71.3 percent year on year. In particular, a total of 426.0 billion yuan of government securities was issued with a year on year increase of 109.5 billion yuan or 34.6 percent. A total of 346.2 billion yuan of policy financial bonds was issued, an increase of 156.2 billion yuan or 82.2 percent. A total of 195.5 billion yuan worth of corporate bonds (including short-term corporate financing bills worth of 144.7 billion yuan) was issued, representing an increase of 165.2 billion from the same period of the last year.

 

Affected by abundant liquidity in the market, the issuing rates of bonds showed an obvious declining trend in the first quarter, but rose slightly in the second quarter yet still below the level in the last year. The 3-year and 5-year bearer's treasury bonds issued in the first half of the year offered an interest rate of 3.14 percent and 3.49 percent respectively, 0.23 percentage points and 0.32 percentage points lower than those of the same period of last year. The Issuing rate of book-entry treasury bonds issued in May of this year (6th issue) was 2.62 percent, 0.ll percentage points higher than that of the 7-year book-entry treasury bonds (1st issue) issued in February and down 0.39 percentage points compared with that of the 13th issue book-entry treasury bonds issued in November 2005.

 

Commercial paper market grew smoothly and quickly

 

In the first half of 2006, a total of 2.71 trillion yuan worth of bills was issued by the corporate sector, up 30.25 percent year on year; the amount of discount bills totaled 4.44 trillion yuan, up 48.75 percent compared with the same period of 2005, while that of rediscount bills reached 559 million yuan, representing a year on year decrease of 1.58 billion yuan. At end-June, the outstanding balance of commercial paper stood at 2.34 trillion yuan, up 38.56 percent year on year; the outstanding balance of discount bills was 1.73 trillion yuan, up 44.65 percent; the outstanding balance of rediscount bills was 559 million yuan, 696 million yuan less than that recorded a year ago.

 

Stock market traded briskly

 

Supported by favorable factors including sustained economic growth, substantial progress in the reform of non-tradable state shares and smooth progress in restructuring securities company, investors' confidence in the stock market strengthened gradually, as reflected in brisk trading activities and evident rise in the stock price indices. In the first half of the year, the total turnover of the Shanghai and and Shenzhen Stock Exchanges reached 3.81 trillion yuan, up 2.38 trillion yuan year on year, with daily average turnover up 2.7 times year on year to 32.8 billion yuan. In particular, the turnover of A-shares reached 3.75 trillion yuan, 2.36 trillion yuan more than that of the same period of the last year, with the daily average turnover registered 32.3 billion yuan, 2.7 times of that in the same period last year.

 

The Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index edged up to 1696 points and 438 points in June respectively, both posting their highest levels since May 2004. At end-June, the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index close at 1672 and 433 points respectively, up 44 percent and 55.2 percent from end-2005, indicating a clear recovery of market confidence.

 

In the first half of the year, a total of 144.17 billion yuan (including IPOs, additional offerings, and rights issues) was raised by Chinese enterprises on the equity market at home and abroad, 53.37 billion yuan or 58.8 percent more than that in the corresponding period in 2005. In particular, a total of 36.68 billion yuan and US$13.43 billion were raised in A-share market and H-share market respectively.

To enhance the development of capital market is an important step in improving the transmission mechanism for monetary policy. Efforts should be taken in boosting direct financing; improving a modern market system and making market play a fundamental role in resource allocation to a greater extent through cultivating a capital market with transparent and efficient framework, rational structure, fully-fledged mechanism, effective function and safe operation.

 

Insurance industry continued to flourish and its asset structure further diversified

 

In the first half of the year, the total premium income of the insurance industry reached 308.0 billion yuan, up 13.7 percent; accumulated insurance claim payments grew by 19.2 percent to 64.2 billion yuan. At end-June, total assets of the insurance companies grew by 27.2 percent year on year to 1.73 trillion yuan, reflecting a continued rapid growth.

 

Table 3 Use of Insurance Fund at end-June 2006

	Outstanding balance (100 million yuan)		As a percentage of total assets（%）
	H1 2006	H1 2005	H1 2006	H1 2005
Total assets	17341	13633	100	100
Of which, Bank deposits	5667	5065	32.7	37.2
Investment	10141	7381	58.5	54.1
Government Securities	3685	3270	21.3	24
Securities Investment Funds	783	885	4.5	6.5
Other Investment	5673	3226	32.7	23.7

Source: China Insurance Regulatory Commission

 

Assets of insurance companies further diversified with expansion of investment channels, rapid growth of the bond market and improvement of market operation mechanism. Excluding government securities and securities investment funds, other investments (including investment in financial bonds, corporate bonds, and equities) increased considerably by 75.9 percent year on year with its share in the total assets growing evidently, while the share of bank deposits declined markedly.

 

Trading of foreign currency pairs at interbank market was active

 

In the first half of the year, the cumulative turnover of RMB forward transactions in the interbank foreign exchange market totaled 7.41 billion yuan. The combined turnover of all 8 currency pairs trading in the interbank foreign exchange market totaled US$37.3 billion, with most transactions in the currency pairs of USD/HKD, USD/JPY, and EUR/USD, accounting for 83.6 percent of the total trading volume, reflecting active trading in the interbank foreign exchange market.

 

Financial market institution building

 

Advance steadily the development of money market and bond market

 

Taking innovation of financial product as a breakthrough, the PBC actively and steadily advanced the development of money and bond markets, and expanded financing channels for economic entities and optimized structure of financial assets. Issuance of short-term financing bills by enterprises increased in volume and the common financial bond and subordinated bond were issued smoothly. The pilot reform for credit asset securitization and interest rate swap was promoted and trading volume of bond forward transactions grew steadily; straight-through processing and registration and settlement system operated smoothly, further contributing to market efficiency.

 

Significant progress in non-tradable shares reform and securities companies restructuring proceeded firmly

 

By June 30, a total of 1,092 companies listed in Shanghai and Shenzhen Stock Exchanges have accomplished or launched non-tradable shares reform, accounting for 81 percent of A-share listed companies to be reformed, 80 percent of their market capitalization, and 78 percent of equities, reflecting a significant progress in non-tradable shares reform. With the advancing of non-tradable share reform, to recover the financing function of the market becomes the intrinsic requirement of market development. On May 6 and 17, 2006, China securities Regulatory Commission (hereinafter referred to as CSRC) promulgated Administrative Measures for Securities Issuance of Listed Companies and Administrative Measures for IPO and Listing to introduce the principle that all the shares of new IPOs must be tradable and to gradually recover financing function of the stock market. On May 25, the China CAMC Engineering Co. released its prospectus and became the first company to have all IPO shares tradable. The resumption of IPO in A-share market indicated marked the accomplishment of the goal of making all IPO shares tradable in non-tradable shares reform.

 

Based on overall arrangement of the State Council and the principle of seeking both a temporary solution and a permanent cure but focusing on the latter, the PBC and other relevant government agencies continued to advance restructuring of securities companies with valuable potential and social impact. In the first half of the year, the People's Bank of China and the China Securities Regulatory Commission, with the support of the People's Government of Shandong province and the People's government of Chongqing Municipality, completed the restructuring of Tiantong Securities and Southwest Securities respectively. According to the restructuring plan approved by the State Council, Tiantong Securities Co., Ltd. was closed and its securities business and assets was brought into custody of Qilu Securities Co., Ltd. While addressing problems such as inadequate capital and liquidities difficulties in securities companies, emphasis was also laid on promoting the transformation of the operational mechanism, advancing the establishment of a corporate governance structure and a strict internal control system in line with modern enterprise system and encouraging the institutional building and innovation of securities companies.

 

Actively promote development of insurance market

 

To speed up development of insurance sector, the State Council promulgated the Guidelines of the State Council on Reform and Development of Insurance Industry (thereinafter referred to as Guidelines) on June 26 to clarify the role of insurance industry in economic and social development and to define the guideline, overall objective and main tasks for development of insurance industry. The Guideline pointed out that reform should be deepened in operational mechanism for utilization of insurance fund through the channels such as direct or indirect capital market investment, equity investment in commercial banks or investment in asset backed securitization products.

 

In addition, the China Insurance Regulatory Commission and the China Banking Regulatory commission jointly promulgated the Notice of China Insurance Regulatory Commission and China Banking Regulatory Commission of Regulating Banks' Commission Insurance Business on July 3, 2006 to strengthen management of banks' commission insurance business in seven aspects such as commission institution's qualification, internal control of commission business, commission charge, sales employee qualification, insurance product sales regulation, supervision and monitoring, and communication within and outside the industry.

 

 

Source: CHINAMONEY Journal