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Chen Gangming: Speech at 2019 Chinabond Annual Conference

 

Dear guests, ladies and gentlemen,

Good morning! First of all, on behalf of China Central Depository and Clearing Co., Ltd., I would like to express my sincere gratitude and warm welcome to you.

In the process of responding to the “new normal”, the bond market is closely related to the supply-side structural reform. The bond market is the most important direct financing market and one of the main venues for the conduct of supply-side structural reforms; it is also an important platform for supporting macroeconomic policies, strengthening financial risk prevention and promoting the internationalization of the RMB. At the same time, the bond market itself needs to improve the quality and efficiency of service through reform and innovation. According to the statistics of the BIS, China's bond market by the end of 2018 stood at the second place in the world, only after the United States. With our market scale being up, the institutions have to keep up, and we need to solve the structural problems and promote the high-quality development of the bond market.

1. Improve the service function of the bond market and adapt to the high quality development

In order to support the economic transformation, the structure of the bond market needs to be further optimized, and the investment and financing functions need to be further improved.

First, we must support the development of high-yield bonds and increase market inclusiveness. In terms of scale, China's corporate credit bond market ranks second in the world. However, from the perspective of the issuance structure, the issuance of bonds of low and medium credit rating is relatively small, and it is more difficult to issue these bonds in the event of market shock. It is necessary to enhance the inclusiveness of the bond market, promote the construction of a multi-layer bond market, and ensure that honest and trustworthy private enterprises have more access to bond financing. It is important to vigorously develop high-yield bonds, so that the bond market benefit more SMEs, and to promote the expansion of bond issuer base through product innovations. It is also important to reform the investment risk assessment mechanism of market institutions to foster the institutional investor base of high-yield bonds; to improve the financing guarantee system for small and medium-sized enterprises by using both policy and commercial arrangements; and to improve the transfer mechanism of default bonds, improve the default disposal arrangements, and strengthen the protection of the legitimate rights and interests of investors. It is also necessary to actively regulate the rating agencies so that the ratings objectively reflect the real situation of the enterprise, and establish a rating verification mechanism between the public ratings and the market implied ratings.

The second is to promote the development of green bonds and facilitate the ecological construction. In recent years, China's green bond market has seen a leap-forward development and has become one of the largest green bond markets in the world with the most diversified issuers. At the end of 2018, China's outstanding labeling green bonds reached 282.6 billion yuan. However, compared with other bonds, the advantage of issuance of green bonds is marginal in China. It is recommended to establish a universal and routine environmental information disclosure system, foster green investment funds which link the projects and bond products, consolidate the micro-foundation of green economy, reduce compliance costs, issuance costs and investment costs, and promote the sustainable and healthy development of green bonds.

The third is to expand the development of hybrid financing instruments and asset securitization, supporting structural de-leverage. During the past two years, under the regulatory requirements such as de-leverage and the balance sheet consolidation to include non-standard products, financial institutions experienced a major capital drain. In addition, the downturn economic pressure requires counter-cyclical adjustment of credit. Thus, the demand for supplementary capital is urgent. It is recommended to strongly support qualified financial institutions to issue hybrid instruments, seize the favorable time window to absorb more primary and secondary capital buffer. Non-financial enterprises can be encouraged to issue varieties such as perpetual bonds, convertible bonds and special bonds for de-leverage. In addition, it is important to promote the legit use of asset securitization and the exchange of credit assets to meet the needs of de-leveraging and restructuring.

 

2. Promote the fundamental reform of the bond market, and maintain the bottom line of risk control

The bond market is an important part of the financial market, and its healthy and stable development is crucial to financial security.

First, we must coordinate the construction of financial infrastructure to ensure the smooth operation of the market. Infrastructure is the cornerstone of the safe and efficient operation of financial markets, and it is called the “The Pillars of a Great Power”. In recent years, China has attached great importance to the construction of financial infrastructure and underlined the tasks to strengthen the supervision and interconnection of financial infrastructures. Promoting infrastructure construction calls for the effective integration of infrastructures. Unifying depository facilities is in line with market rules and international practices and is an international standard for financial infrastructure construction. For the bond market, it means improving the uniformity of the bond market, promoting the integration of the depository and settlement system, optimizing the infrastructure layout, and enhancing interconnection and interoperability, so that the overall market structure is simpler, clearer and more efficient. On this basis, we need to further improve the bond market monitoring platform and continuously monitor and analyze the risks of market volatility, capital flow, abnormal trading, and leverage operations.

The second is to innovate risk management tools to meet the needs of market risk management. We need to continuously improve the collateral management mechanism and further exert the role of bond collateral as the “liquidity hub” and “risk management hub” of the market. At present, the Chinabond Collateral Center manages nearly 13 trillion yuan of collateral and is the world's largest bond collateral management platform. It is important to fully implement the daily mark-to-market mechanism and conduct daily monitor of pledge risk. We need to accelerate the introduction of safe and efficient liquidity risk management tools and launch a central bond lending mechanism as soon as possible to reduce the risk of settlement failure. We need to well sequence the development of interest rates based, exchange rates based and other derivatives, and relax when appropriate the entry of commercial banks and insurance institutions into Treasury bond futures trading in order to effectively meet the market demand for hedging risks. Recently, due to the dual impact of the lift of fiduciary repayment duty and the economic downturn, market credit risk has gradually materialized, credit events and rating adjustments have received wide attention. It is necessary to strengthen the early warning function and complementary role of market implied rating and to continue to explore credit risk mitigation tools, fostering a sound market environment.

The third is to strengthen the construction of risk management systems and enhance the protection of investor rights and interests. We will push forward the system construction in terms of early prevention, contingency response, and post-treatment, enhancing the safety and stability of market operations. It is of great importance to further improve the information disclosure system, unify the requirements for information disclosure, impose more format requirements for information disclosure, enhance the process of information disclosure in the context of issuance, and promote market transparency. It is necessary to improve the rating system and improve the capability of rating companies to reveal credit risk, so that credit risk can be well perceived and incorporated in investment decision. It is necessary to enrich the investor protection clauses in the issuance documents, establish a trustee system, fine tune bond default disposal and collateral default disposal mechanisms, and improve market clearing efficiency.

 

3. Promote a well-paced, upgraded opening up of bond market

Opening up brings vitality. Recent years, China bond market has been sticking to opening up commitment with more and more international organizations and overseas institutions participating through various channels. As of the end of June 2019, foreign bond holdings under the depository of CCDC amount to 1.7 trillion yuan, an increase of 22% over the same period of last year, and 90% of the holdings are through direct account. The international traction of the Chinese bond market continues to increase. However, compared with developed markets, there is much room for improvement in the breadth and depth of openness for the bond market as measured in proportion to China's economic status in the world.

First, it is necessary to attract more foreign entities to participate in the domestic market. We need to further improve the direct access into the market and let the on-shore price play the dominating role. It is recommended to simplify the documentation and procedures for the account opening of foreign investors by piloting the recordation system. Electronic filing and account practice can benefit the process of opening bond account and trading account. It is important to further explore the issuance in the free trade zone, providing more convenience for foreign entities. It is necessary to expand the scale of the “Belt and Road” bond issuance and provide a supporting platform for cross-regional financing.

The second is to appropriately relax the restrictions on the use of trading tools. It is recommended to lift some of the restrictions on foreign investors participating in repo transactions under the premise of proper leverage controls. And if mainly used for hedging, foreign investors' risk hedging instruments can be relaxed to attract more overseas long-term investors to allocate more into domestic bonds. Well-controlled lift of restrictions on bond lending may help reduce the risk of insufficient cross-border positions for settlement. Consideration may be given to extending the default disposal mechanism from repo area to cross-border transactions in response to concerns from foreign investors.

The third is to strengthen international infrastructure cooperation. It is necessary to explore the cross-border interconnection of central depository institutions. By utilizing the synergy of domestic depository institutions, overseas depository institutions and domestic banking institutions, and by supplementing each other, the access for foreign investors to Chinese market will benefit. It is necessary to promote cross-border mutual recognition of collateral, so that renminbi bond assets can better play the functions of safe public goods and transaction support.

 

Leaders, distinguished guests, the China’s bond market is in a new era of vibrant development. We believe that under the correct guidance of the regulatory bodies and with the joint efforts of all parties in the market, China's bond market will make good improvements in terms of quality and efficiency, tap its greater potential, improve its vitality, and play a more important role.

Finally, I wish this annual conference a complete success, thank you!

2019.07.19
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