BEIJING, July 20 (Xinhua) -- After a 23-year long separation, China's interbank and exchange bond markets are ultimately interconnected along with the regulatory approval on Sunday.
On July 19, Chinese central bank and securities regulator jointly issued an announcement approving interconnectivity cooperation between related infrastructure institutions on the country's interbank and exchange bond markets.
As the announcement says, infrastructure institutions such as registration, depository and settlement agencies are allowed to jointly provide services including bond issuance, registration and custody, clearing and settlement, and interest payment for bond issuers and investors.
Since 1997, banks in China have been banned from repurchase agreement and cash bond transactions on exchange market, China's interbank bond market came in the same year into being, marking the start of a 23-year long separated running of the country's interbank and exchange bond markets.
Market watchers thus broadly deem the market interconnectivity as a milestone event. But how China's interbank and bourse-based bond markets will be unified afterwards remains a key question for them given its complexity.
Interconnectivity seen a milestone event
For a long time, connecting interbank bond market with exchange bond market is the hope of most market watchers after banks were required to exit exchange bond market in 1997.
Generally, there have been independent approval, depository, transaction, clearing, and supervision systems for the interbank and exchange bond markets. Despite that the later-developed trans-custody for part of bond products provides a channel of circulation between the two markets, its non-electronic application fails to break the obstacles barring circulation of bonds between the two markets.
All of these resulted in low pricing efficiency due to existence of two different sets of yield curves used for valuation, different liquidity for the same product because of differences in market players, size and transaction rules and the past lack of bond repayment default.
How will the over 10 bln yuan markets be unified
In spite of the inconveniences brought by the separated markets, the interconnectivity of the interbank and exchange bond markets is not a simple project to combine.
As the Sunday-posted announcement tells, the interconnectivity refers to a mechanism enabling qualified investors to purchase or sell via infrastructure institutions for the interconnectivity bonds tradable on both the interbank and exchange bond markets.
In the past, a huge obstacle to link the two markets was that backstage information behind the two markets could not be shared, said Zhong Huiyong, associate professor with Shanghai University of International Business and Economics, highlighting that the future development of China's bond market should be characterized by a unified market instead of division.
According to the announcement, nominal bond holder accounts are required to be opened between bond registration, depository and settlement agencies on interbank bond market and those between interbank and exchange bond market, in a bid to record balances of all the nominally-held bonds and the related bond holding records are the legal proof of the rights and interest for its investors.
What's more, Chinese central bank and China Securities Regulatory Commission (CSRC) will jointly supervise and regulate the issuance, registration, transaction, custody, clearance and settlement of related bonds.
Most importantly, China Development Bank, policy banks, state-owned commercial banks, joint stock commercial banks, urban commercial banks, foreign-funded banks in China and other banks listed in China can opt for opening accounts or trade via the interconnectivity mechanism to take part in cash bond agreement transaction on the exchange bond market.
By the end of June, outstanding bonds under custody on China's bond market mounted up to 107.8 trillion yuan, ranking already the second worldwide, showed statistics from Chinese central bank.
A step closer to higher quality development
Apparently, interconnectivity of the interbank and exchange bond markets will improve market liquidity and risk reflection and pricing efficiency as well when facilitating transaction and capital flows.
Zhang Xu, chief fixed-income analyst with Everbright Securities said the cross-market innovation and transaction is also helpful to vitalize existing bonds in China and reduce the cross-market arbitrage due to different rules on the two bond markets.
Apart from these, foreign investors can also benefit from the market interconnectivity as the move will lower the complexity of their account opening and related transactions, which may in turn improves the attractiveness of China's bond market and press ahead with the internationalization of Chinese currency yuan.
Alongside the improvement of China's bond market effectiveness, the future market expansion and deepening are expectable, said Hu Yuexiao, chief fixed-income analyst with the research institute of Shanghai Securities.
In Hu's eyes, the move will significantly affect the deepening and optimization of China's capital market as the economic transformation needs the capital market to play a bigger role and deeper development of bond market reform is the key step for capital market to function this way. (Edited by Duan Jing with Xinhua Silk Road, duanjing@xinhua.org)
A single purchase
