China's paper market: The status quo and development strategies

by Wang Xiuli

 

 

As an important part of the money market, the paper market is the only sub-market that has close relationship with economic

entities, playing an important role in exploring financing channels for enterprises, easing small and medium-sized enterprises' difficulties in financing, promoting the asset structure adjustment of commercial banks, improving their financial services, and enhancing their competitiveness.

The development characteristics in the current paper market are as follows. With an increasing trend of short-term loans taking the form of papers, the scale of paper business keeps expanding; the proportion of commercial acceptance goes up as paper business innovations are accelerated; the ratio of advanced money over total acceptance, a key indicator of paper risks, has declined markedly, and the asset quality of papers is better than that of loans; the professional level of paper operation has been raised and the rediscount market is active; paper financing has expanded its shares and become a major financing channel for small and medium-sized enterprises; an electronic paper market is taking shape, and the timely introduction of the www.chinacp.com.cn has great significance in the modernization of China's paper market transactions.

Some problems in the paper market are worth attention. The first one is about the trading background of papers. The principle of real trading background of papers is not strictly followed by some enterprises in issuing and accepting commercial papers and by some commercial banks in accepting and discounting commercial papers. The current papers, either of bank acceptance or of commercial acceptance, are all trading papers. Financing papers, even if permitted by laws, cannot, by definition, be commercial papers. Without its trading background, a commercial acceptance paper is actually a short-term bond with potential risks that cannot be neglected, because the paper market has no credit rating system for this kind of financing paper. The second problem lies in the internal management of paper business in financial institutions. Some branches of commercial banks lower the conditions for acceptance and discount, as well as the examination of the real trading background; some financial institutions with imperfect credit line system and internal control engage in acceptance beyond their capability. The third problem is the limited  varieties of market tools. In current trading papers, bank acceptance accounts for 87 per cent of the grand total. The development of paper business depending on bank credit is unfavorable to the financial institutions, averting paper risks, and to the continuous sound development of China's paper market. Fourthly, the charges on paper acceptance are on fixed rate basis and are comparatively low. The present staticties practice of discount and rediscount accounts is not rational. The paper acceptance of commercial banks is not only a clearing service, but also a credit granting business. A fixed rate charge on acceptance, contradictory to the principle of market pricing, fails to compensate the commercial banks for their different risks. Due to the different credit rating of each enterprise, banks suffer different risks from acceptance. According to the current financial statistical system, the balance of discount and rediscount belongs to the balance of loans. The discount and rediscount of papers, however, are activities of securities trading. The rediscount, in particular, is actually an interbank funding. The last problem is related to the effective regulation of the paper market by the central bank through rediscount.

For these problems, the author puts forward some policy suggestions as follows. The central bank should strictly follow the principle of real trading background of commercial papers to reinforce the management of the regularity of papers. Paper market tools must be enriched in an active but moderate manner: commercial acceptance should be promoted and, in the meantime, financing papers should be piloted. The charging pattern for paper acceptance has to be adjusted, and discount and rediscount be ruled out of loans. Rediscount rate should be adjusted in time, and more attention be paid to the regulating function of rediscount. Rediscount operation should be further improved and perfected, so as to give full play to its function to adjust the total volume and credit structure.