China will open up its bond market to foreign investors and embrace the use derivatives, a senior Chinese politician said yesterday in a speech that laid out major ambitions for the expansion of its financial markets.
Vice finance minister Li Yong said that China’s bond market was developing very fast, noting it had grown from Rmb478 billion ($76 million) in 1997 to Rmb22 trillion in 2011, while turnover had “rocketed” to Rmb200 trillion from Rmb600 billion.
China “wants to open up the market to foreigners to invest,” Li told a seminar at the ADB meetings yesterday, revealing that the intention is to “introduce financial derivatives such as Treasury futures”.
Issuers including the World Bank and ADB among others have issued onshore “panda bonds” while some Rmb2 trillion worth of dim-sum bonds – renminbi debt sold in offshore markets – had been issued through Hong Kong and London. China’s bond investor base, including institutional investors such as pension and housing funds, was expanding rapidly, Li said.
Meanwhile China will also “actively participate” in efforts to strengthen regional bond markets, he added while praising Thursday’s decision by the ASEAN+3 finance ministers and central bank governors to strengthen the Asian Bond Market Initiative (ABMI).
China’s bond market has changed beyond belief in recent years. Mandarins, led by China Development Bank and the ‘Big Four’ commercial lenders, rolled out a market for short-term commercial paper in late 2005. Beijing has also nurtured the creation of a large market for sovereign and corporate bonds.
However he gave a downbeat assessment of the global economy, which he said was currently “very weak” in certain regions. In order to maintain financial stability China needed to expand its bond market so as to maximize access to “direct finance” from domestic investors, Li said.
The moves would follow steps to tap into the high-yield market. In February China’s securities watchdog met with brokerages and ratings agencies to tell them about plans to launch a junk bond market.
The move surprised and pleased many, as China’s army of small- and medium-sized enterprises (SMEs) are desperate for capital.
China’s junk bond market has been late in arriving in part because Beijing fears the move will let speculative investors loose onto the market. Loss of face, if any the junk bonds blew up, would embarrass a government that fears being unable to control a new market. Beijing also does not want to be a backstop to investors if corporates and the junk bonds they issue get into financial trouble.
China’s leaders are currently seeking to approve and promote only high-yield bonds from credible SME borrowers with a strong track record. There should be many to choose from: the country is reckoned by the finance ministry to be home to 50 million SMEs, counting for 80% of the jobs created in the mainland.
Yet high-yield borrowers have not always proved reliable. Fraud and financial turmoil has dogged several borrowers over the past year, notably when Toronto-listed Sino-Forest was accused of fraud by Muddy Waters, an American short seller. The Chinese timber company entered bankruptcy protection on 30 March this year, and will restructured or broken up and sold.