China Considers Opening Up Debt Capital Market

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Nov. 18 – Zhou Xiaochuan, governor of the People’s Bank of China, believes that the openness of debt capital market will greatly contribute to the foundation of a more mature market-oriented economy at a time when China expects more speculative investment inflow after the second round of quantitative easing by the U.S. Federal Reserve.

Zhou cast his “pool” theory on November 16 while attending the China Global Debt Capital Markets Congress co-hosted by the People’s Bank of China and the National Association of Financial Market Institutional Investors, in response to the concern of hot money inflows. Zhou said that China hopes to build up a “pool” where most of the speculative capital flows, instead of letting the excess money flood into the country’s real economy.

While people wonder whether the pool should be placed in the stock or real estate market, the two major markets where the speculators seem most likely to go, Vice President Ba Shusong of the State Counci’s Research Center of Finance says it is more possible that China is building up the pool in the bond market.

When compared to the fluctuating stock and real estate markets, Ba believes that the stable bond market, if reformed and regulated to attract most of so-called hot money, will work better for the future development of China’s real economy. Ba also points out that although it usually takes longer for the bond market to have massive profit return, a “pool” in this market supported by new opening-up policies will still be attractive to investors since there are no legal channels yet for foreign speculators to invest in China’s stock or real estate markets. Ba suggests the pool should be a special area in the bond market selling distinct bond products to foreign investors.

Zhou Xiaochuan also expressed his concern for the excessive administrative regulations in China’s debt capital market. He says the government needs to reduce redundant intervention and carry on with market-oriented reforms to ensure the robust development of the country’s debt capital market. Zhou also confirms that China’s bond market should primarily be an over-the-counter market and mainly deal with institutional investors.

China’s bond market is growing into the second largest in Asia, and the world’s sixth, but Zhou points out that the market desires more development in risk control, diversity in financial products and institutional investors, market liquidity, market-oriented pricing, credence evaluation and regulations.

The government needs to improve the efficiency of bond issuing to meet the massive demands in the future open market, a banker working in a major investment bank told