Bonds News
- Bond market to boom
Date: 23-Nov-2006 Sources: (Shenzhen Daily)
THE domestic debt capital market could grow 20 percent a year in the next decade to become roughly as big as the U.S. Treasury market by 2016, according to an analysis by Goldman Sachs.
China's ageing population, strong domestic growth and the prospects of financial deregulation all point to a much larger domestic debt market, which has already soared to around 27 percent of gross domestic product (GDP) from around 5 percent in 1997, the bank said.
'Provided further progress is made toward domestic financial liberalization and capital account convertibility, China's bond market capitalization could double, from 27 percent of GDP currently to around 60 percent by 2016, and could represent between 4 percent and 10 percent of G7 fixed-income markets at that point - comparable to the share held by the German and French bond markets combined today,'the report said.
At 60 percent of GDP, the debt market would be roughly the same size as the US$4.5 trillion U.S. Treasury market.
The volume of debt securities outstanding has grown in real terms by 34 percent a year in the past decade, to 5.6 trillion yuan at the end of September from 466 billion yuan (US$59.06 billion) in 1997, but Goldman said the headline growth belies an immature market.
Government bonds make up half of the debt issuance, with State-owned policy banks accounting for a further 37 percent.
Non-financial corporate debt of all maturities, including a booming commercial paper market launched in May 2005, makes up just 9 percent of the total.
Trading is light, too, with banks and credit cooperatives, which own close to 75 percent of outstanding debt, holding most securities to maturity, Goldman said.
Rising per capita incomes and an ageing population should fuel the organic growth of China's market in the coming decades.
But for the market to fulfil its potential, Goldman says government domination of the bank-based financial system needs to give way to market-driven price-setting with a new universe of institutional investors to the fore.
To that end, Goldman urges China to tackle three inter-related priorities in macro policy:
- Allowing greater yuan flexibility and gradually removing interest rate controls.
- Reducing the role of the banking sector as an arm of the State. 'This is likely to be a difficult divorce,'it said.
- Promoting a diversified base of non-bank institutional investors. China could learn from the experiences of Germany, France and Japan and use fiscal levers to encourage a shift in funds from bank deposits into mutual funds, voluntary insurance and pension schemes, the report said.
In detail, Goldman urged China to scrap administrative curbs, including quotas that stunt corporate borrowing, to foster a vibrant credit culture and to bar institutional investors and corporations from the interbank market so dealers have an incentive to offer liquidity and so stimulate secondary trading.
Goldman said the passage in August of a new bankruptcy law, the creation of the commercial paper market, the inaugural issuance this year of a corporate bond without a bank guarantee and new rules to spur bond short-selling show China appears to be moving forward on many of these initiatives.
But developing a market where resource allocation is based on price signals rather than quantity controls would require a willingness to embrace regulatory flexibility and what Goldman called a market-oriented mindset.
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