Building debt capital markets in China

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The main directions of our project are organized under three headings.Sovereign bonds: This concerns the trading of securities issued by the central government to domestic and foreign savers including short-term instruments (Treasury bills) and longer term instruments (Treasury notes and bonds). The modernisation and liberalization this market has typically proceeded by organizing security issues to permit trading over the full range of the term structure from less than one-month to twenty years or more. By issuing standardized contracts (e.g., non-callable, non-amortizing bonds) at regular intervals it can allow users and the fiscal authority the means of managing risks flexibly over a very long time horizon. Through a process of arbitrage it can facilitate the development of liquid trading of a wide range of other instruments used in money markets and debt capital markets. Liberalizing this market involves increasing the range of institutions participating in the market and eliminating or greatly relaxing quantitative controls. Institutional development to support this process involves simplification and effective regulation of pre-trade and post-trade services including market-making (both primary and secondary), clearing and settlement, managing central securities depositories and custodians. The development of this market is often accompanied by a change of the methods of monetary control with the progressive elimination of quantitative tools (credit quantities, reserve ratios...) and increased reliance on controls through broad monetary aggregates and price-based (interest rate) policy tools. Implementing monetary policy using a liquid sovereign debt market requires policy makers to rethink how they hope to achieve objectives for price stability, exchange rates and credit (and investment) growth. Corporate bonds: The development of a broad and liquid corporate bond market can provide an effective means of providing funds to private sector enterprises as an alternative to bank finance which may result in lower costs of debt capital and thus promote growth. For savers investing in a broadly diversified portfolio of corporate bonds can provide better risk adjusted returns than investing in stock markets or bank savings accounts alone. They can play a large and important role in retirement finance as one of the main investment vehicles for life insurers and pension funds. Developing an efficient corporate bond market involves overcoming a range of important institutional challenges. It requires provision of investor protections against abusive trading practices. These rely on sound accounting and reporting standards for issuers, insurance, pensions and fund managers. It requires collection and dissemination of information about credit histories and ratings. It requires well-designed bankruptcy regimes with sound legal foundations and efficient administration. Corporate bond markets can become fragmented across maturities and legal status of issuers. Providing liquid trading of corporate bonds is challenging, and developing repurchase agreements, securities lending and other forms of securities funding transactions can be key to reducing transactions costs. Sub-sovereign/muni bonds: This segment of the bond market is directed at the funding of public sector investments that are not supported by the budget of the central government. It involves bond issues by regional and local governments and special purpose public and quasi-public entities (highway authorities, water authorities, etc.) The development of this market segment is intimately related to the organization of local public finance. Thus our research will necessarily take into the account the particular Chinese structure of organizing both government entities and also state owned enterprises. In the current context reforms in the area will need to deal with the issue of an overhang of non-performing loans.