DEVELOP CORPORATE BOND MARKET STEADILY, OPTIMIZE FINANCIAL ASSET STRUCTURE

by Wu Xiaoling, Deputy Governor, the PeopleÕs Bank of China

China's existing financial structure is not conducive to the adjustment of market structure and adds to the economic operation cost

While China's financial market has developed over the past few years, its financial asset structure is still characterized by two distinctive features: first, an excessively high ratio of indirect financing and slow development of direct financing; second, an overly high percentage of government bonds in direct financing and the over many resources controlled by the government.

The backwardness of direct finance situation in China, on the one hand, results in enormous amounts of idle money in want of direct investment channels. On the other hand, when enterprises face changes in product and fund supply they are unable to choose favorable financing strategies to cut financing costs and adjust production, thus increasing the NPLs in banks and adding to the fiscal burden on governments at various levels. In this way, risks which should have been shouldered by market players in the market economy development are now borne by banks and governments, pumping up the social cost of economic operation.

Nurturing direct finance will require improving the corporate bond market. Developing the corporate bond market, improving financial asset structure, and boosting the overall progress of China's financial market are all important topics on the agenda.

Responsibilities to shoulder risks should be clarified and institutional investors must be fostered

To facilitate the development of corporate bonds, first of all, responsibilities to shoulder risks should be clarified. By investing in an enterprise through bond purchasing, investors have the right to the principal and interest after an appointed period, and, in the meantime, they should take on the risk of the enterprise's default and indebtedness. This important principle, however, is not reflected in China's existing laws or regulations. The administrative rules for issuing corporate bonds currently demands a compulsory guarantee, which in most cases is made by state-owned banks. As a result, revisions should be made to current administrative rules governing corporate bonds and compulsory guarantee requirement must be cancelled.

Secondly, the corporate bond market would benefit by nurturing institutional investors. Investing in corporate bonds requires investors to collect and process enormous amounts of information, thus creating a high demand for investors' risk identification; at the same time, the comparatively small movement in bond prices means that only bulk buying can cut costs effectively. This indicates that only those institutional investors with the power to identify and shoulder risks are the ideal investors in corporate bonds. Therefore, it would be beneficial to cultivate institutional investors such as insurance companies, commercial banks, pension funds, and investment funds.

Thirdly, to develop China's corporate bond market, we should learn lessons from past experience in market management and construction. There are a few reasons for the lag in China's corporate bond market development. The current administration of corporate bond issuance imposes too many restrictions. With heavy governmental intervention, the system of examination and approval has made corporate bonds a tool used by local governments to support local economies and complement inadequate loans. This greatly increases the default risk of corporate bonds. Furthermore, as the main body of corporate bond buyers, individual investors cannot match the risk level of corporate bonds. Finally, the market lacks a sound rating and information disclosure system. Stricter issuance restrictions are imposed on the administration of corporate bond without appropriately learning from the historical experience and lessons. The existing corporate bond issuance administration aims for zero risk, for the authority is concerned about potential social instability resulting from corporate bond defaults.

Intermediary organizations should be fostered and financial services should be improved

First, an effective credit rating system and strict information disclosure system should be set up for corporate bonds, and rating agencies should be encouraged. Second, supervision should follow the demands of corporate bond trading, allowing market players to choose market and trading patterns. Based on that, efforts should be made to improve market management, gradually loosen restrictions on the market, and set up effective incentive mechanisms, thus giving full play to intermediaries and other participants. Third, improvement must be made in bond custody and settlement, so as to raise the efficiency of bond trading. For instance, the current custody mode for bonds and clients' funds must be thoroughly reformed for it cannot technically ensure that clients' assets or funds will not be misappropriated.

Supervision coordination should be strengthened and functional supervision should be established

To begin with, it should be clarified that bond market supervision should concentrate on functional supervision, and that the establishment of operational rules, market access, and daily supervision in the bond market should fall under the corresponding market supervision departments, in order to avoid both overlap and oversight. The supervisory should be oriented towards the establishment of rules for bond issuing and trading, as well as the setting and execution of the system of information disclosure and credit rating. On this premise, limitations should be lifted concerning issuers' qualification, issuing quota and interest rate; while corporate bond issuance should follow the verification system, and then realize the registration issuance management as soon as possible. Also, a mechanism must be set up to coordinate supervision and raise supervisory efficiency. The coordination among supervisory departments is embodied by unification of supervisory notions and rules, and information sharing.