As approved by the People’s Bank of China and the China Securities Regulatory Commission, China Development Bank (CDB) has recently piloted the issuance of policy-related financial bonds on the Shanghai Stock Exchange (SSE), with the first amount of RMB30 billion. On December 24, the SSE released the “Notice on Pilot Issuance and Trading of Financial Bonds by China Development Bank” and the “SSE Business Operation Guidance on Issuing Bonds by Tendering”, which marked the official start of CDB’s piloting the issuance of policy-related financial bonds on the SSE. After listed commercial banks entered the exchanged-based bond market in 2010, the interflow between on-floor and over-the-counter bond markets has further moved a substantive step.
In recent years, vigorously developing the bond market has become an important part of the capital market development. The Executive Meeting of the State Council held in June this year pointed out that efforts should be made on expanding the bond issuance and realizing the interflow between on-floor and over-the-counter bond markets; and the 3rd Plenary Session of the 18th CPC Central Committee (the “3rd Plenary Session” for short) put forward the idea of developing and standardizing the bond market and enhancing the proportion of direct financing. According to an official of the SSE, the pilot bond issuance of CDB on the SSE is an important measure of relevant competent authority to implement the requirements put forward at the Executive Meeting of the State Council and the “3rd Plenary Session” and to promote the interflow between on-floor and over-the-counter bond markets. At present, China’s bond market can be divided into the inter-bank bond market and the exchange-based bond market, and only treasury bonds and enterprise bonds can be issued and traded across the two markets. Before this pilot, the policy-related financial bonds can only be issued and traded at the inter-bank bond market. In order to promote the sound development of the bond market, according to the arrangement of the regulatory authorities, CDB, the SSE, and China Securities Depository and Clearing Corporation Limited (CSDC) formulated the scheme of pilot issuance of financial bonds on the SSE market, which was officially approved by relevant competent authority on December 13.
Relevant experts believed that the issuance of the CDB bonds on the SSE will exert positive influences on China’s bond market in the following aspects. First, CDB can make use of the SSE’s advantage of various investors to explore diversified issuance channels and enrich its investor groups; second, as CDB possesses the high credit rating of quasi sovereign credit, its bond issuance on the exchange-based market can satisfy the investing demands of small and medium-sized investors and increase residents’ property income; third, it will help to display the characteristics of transparency and efficiency of the SSE’s pricing mechanism, facilitate the improvement of the bond yield curve, and promote the progress of China’s interest rate liberalization; fourth, the pilot issuance of the CDB bonds will contribute to accumulating experience and laying a foundation for the cross-market issuance and trading of other policy-related financial bonds and various bonds products in the future.
Approved by the State Council, CDB was founded in March 1994. It specializes in carrying out the business line of middle and long-term credit loan and investment, and other financial business lines to serve the key middle and long-term development strategies of the national economy. According to the State Council’s scheme of founding CDB, CDB should take the issuance of financial bonds as its major financing method since its establishment, which has decided that the development of CDB is closely related to that of China’s bond market. At present, CDB is the largest issuer of policy-related financial bonds in China and also the first issuer engaging in issuing policy-related financial bonds. Besides, it is also the advocator and the practitioner of the market-oriented bond issuance in the country.
The CDB bonds possess the following features and advantages. First, they have complete varieties and high market liquidity. Till the end of November 2013, the balance of the CDB bonds is RMB5.67 trillion, taking up 20% of that in the inter-bank bond market. The CDB bonds are also one of the most brisk products in the inter-bank bond market. From January to November of 2013, the spot trading volume of the CDB bonds is RMB7.58 trillion, taking up 21% of that of the inter-bank bonds, and the CDB bond yield is one of the most important reference yields in the inter-bank bond market. Second, the CDB bonds have led the market innovation in this industry and witnessed the development innovation of the bonds. CDB has almost participated in all milestones in the development of China’s bond market. From the early floating-rate bonds and the alternative obligations, to the first credit-asset-backed securities and the first kind of domestic USD bonds in recent years, and to the recent “Fuwa Bonds” and F4 benchmark bonds, all these are key innovative products and mechanisms. Besides, CDB is also very active in the international bond market. It launched the Samurai bonds, the Yankee bonds, the global USD bonds, and the global Euro bonds successively in 1996. In 2007, CDB was the first financial institution in China’s mainland to issue RMB bonds in Hong Kong, and it had had the accumulative issuance amount of RMB23.5 billion, making it the financial institution from China’s mainland with the largest scale, the most complete products, and the most innovations of RMB bonds issuance in Hong Kong. Third, CDB has the quasi sovereign credit and the credit rating for CDB made by the international rating institutions is linked up with China’s sovereign rating. As approved by the State Council and the China Banking Regulatory Commission, the risk weight of financial bonds issued by CDB by the end of 2015 is 0% till the maturity date of the bonds, and these financial bonds will be dealt with in the same way as the policy-related financial bonds, indicating the further reinforcement of the position of the CDB bonds as the bond product with the quasi sovereign credit. Relevant laws and regulations stipulate that the interests obtained by individuals through purchasing treasury bonds and the financial bonds approved to be issued by the State Council can be exempt from individual income tax in accordance with relevant rules.
It is learnt that CDB plans to issue the first batch of fixed rate bonds with the amount of no less than RMB10 billion in the near future, including the two-year bonds and the five-year bonds, to all institutional investors and individual investors on the SSE. The bonds will be issued by tendering and the underwriting group will be constituted by 47 financial institutions, including 15 listed commercial banks, 3 insurance companies, and 29 securities companies. Industrial and Commercial Bank of China, Agricultural Bank of China, China Construction Bank, Bank of Communications, CITIC Securities, and Orient Securities will be the lead underwriters. After tendering, the bonds will be distributed offline by the underwriters and then be listed on the SSE.
An official of the SSE introduced that the issuance and listing system of the CDB bonds is the same with that of the treasury bonds. First, the CDB bonds will adopt the public offering method on the SSE and be issued by tendering through organizing the underwriting group. CDB can arrange some bonds to be issued to public investors according to market demands. The issued bonds should be registered for custody at Shanghai Branch of CSDC. Second, the CDB bonds are listed and traded in the SSE trading system and investors of all kinds on the SSE bond market can trade in the secondary market. Third, the CDB bonds can be regarded as the pledged bonds for the collateralized repo of the exchange and the discount coefficient of standard bonds is the same with that of treasury bonds. Besides, the SSE and CSDC have paid high attention to CDB’s bond issuance on the SSE and set up a special work group to formulate special business rules and procedures according to CDB’s issuance demands, and they have arranged the CDB bonds to be listed for trading on the day after the issuance payment is made. In addition, they have improved the functions of the SSE bond tendering system, so as to provide technical support for the issuance of the CDB bonds by tendering. The tendering system, which supports the tendering and distribution business lines of bonds, can arrange the tendering of the bonds with different phases at the same time. The tendering styles include the American style and the Dutch style. From now on, bonds of all kinds on the SSE market can be issued by tendering through this system. Next, the SSE will join hands with other market institutions to do well in terms of product innovation and secondary market trading of the CDB bonds.
The 3rd Plenary Session pointed out that “Building an open and unified market system with orderly competition is the basis for markets to play decisive roles in allocation of resources” and “Efforts should be made on speeding up the forming of a modern market system in which enterprises enjoy independent operation and fair competition, consumers can choose freely and consume autonomously, and commodities and production factors can flow freely and be exchanged equally, and on removing market barriers”. It is believed that CDB’s pilot bond issuance on the SSE will help to accelerate the progress of the interflow between on-floor and over-the-counter markets and the paces of the bond market’s innovation, and that China’s bond market will undoubtedly embrace new development situation and opportunities.
