Chinese Bond Market Challenges Sergey N. Smirnov State University Higher School of Economics Moscow.

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Chinese Bond Market Challenges Sergey N. Smirnov State University Higher School of Economics Moscow
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Transcript of Chinese Bond Market Challenges Sergey N. Smirnov State University Higher School of Economics Moscow.

  • Chinese Bond Market ChallengesSergey N. SmirnovState University Higher School of Economics Moscow

    EFFAS-EBC meeting, June 2009

  • Contents:Chinese Bonds Market OverviewApplying EFFAS-EBC methodology to Chinese Bonds MarketZero-coupon yield curve used by CGSDTC

    EFFAS-EBC meeting, June 2009

  • Market scaleAbout 3000 bonds with total worth 34 704,6 billion RMB issued since 1998Currently traded: 1385 bonds with outstanding amount 16 600 billion RMB (rmb usd rate:1 Chinese yuan = 0.15 U.S. Dollars)About 1000 transactions a day with average daily turnaround about 150 billion RMBBonds are traded at Shanghai and Shenzhen exchanges, OTC and inter-bank markets

    EFFAS-EBC meeting, June 2009

  • Chinese Bonds Market StructureSource: ChinaBond

    EFFAS-EBC meeting, June 2009

  • Chinese Bonds Market StructureSource: ChinaBond

    EFFAS-EBC meeting, June 2009

  • Market InfrastructureThe primary market of bond issuance is largely completed through syndication.Governmental bonds were mostly underwritten by the four stated-owned banks while other commercial banks and securities companies play active role in forming syndicate to market financial and corporate bonds. Most of bonds are held by banks, insurance companies, securities firms, and corporations. Mutual funds hold a relatively small fraction of the total outstanding bonds.

    EFFAS-EBC meeting, June 2009

  • Instruments PresentTreasure Bonds (Ministry of Finance). All terms. Bullet redemption. Majority has coupons.Central Bank Bills (Peoples Bank of China). Very short and short term. Majority are discounted.Government owned BanksAll terms. Majority has coupons. Some have options.Corporate and Commercial Banks BondsOthers

    EFFAS-EBC meeting, June 2009

  • Outstanding Amount

    EFFAS-EBC meeting, June 2009

    2

    23396.579942.116447.273791.8634

    23842.971673018044.274981.1630

    26317.272024220692.348199.8925.26

    26612.972868022974.4410216.41100.56

    28518.1730282.724158.4811457.91814.52

    29860.8738212.726599.1812986.82305.94

    46202.053457031406.7516127.452715.21

    46989.454203035220.8518419.253285.77

    47891.054638538320.8224170.954327.42

    48337.854201039568.1229686.96975.34

    Treasure Bond

    Central Bank Bills

    Government owned banks Bonds

    Corporate Bonds

    Others

    100 million RMB

    1

    Total

    155875476063830039306.621635114311.38

    28865.327840

    3383.33841

    70584670

    Jan 2005Jul 2005Jan 2006Jul 2006Jan 2007Jul 2007Jan 2008Jul 2008Jan 2009May 2009

    1/1/057/1/051/1/067/1/061/1/077/1/071/1/087/1/081/1/095/20/09

    Treasure Bond23396.5723842.9726317.2726612.9728518.1729860.8746202.0546989.4547891.0548337.85

    Central Bank Bills9942.116730202422868030282.738212.734570420304638542010

    Government owned banks Bonds16447.2718044.2720692.3422974.4424158.4826599.1831406.7535220.8538320.8239568.12

    Corporate Bonds3791.84981.18199.810216.411457.912986.816127.4518419.2524170.9529686.9

    Others634630925.261100.561814.522305.942715.213285.774327.426975.34

    BondTypeSum-Actual issuance

    00

    01

    02

    80

    90

    2

    3

  • Current position:Chinese Bonds Market OverviewApplying EFFAS-EBC methodology to Chinese Bonds MarketZero-coupon yield curve used by CGSDTC

    EFFAS-EBC meeting, June 2009

  • History of Zero-Coupon Yield Curves Development in ChinaResearch (1999-2001). With aid of Reuters was developed first yield curve for Treasure bondsPrototypes (2002-2005). Chinese development of 4 yield curves for Treasure bonds using information from different marketsExploitation and Modification (2006 - Present).New methods are developed and yield curves are constructed for different types of bonds.

    EFFAS-EBC meeting, June 2009

  • CGSDTC MethodologyData Filtering

    Expert and Historical Estimates

    Hermite Polynomial Fitting

    EFFAS-EBC meeting, June 2009

  • Data SourcesDeals Prices from Interbank, OTC and Shanghai Exchange markets

    Bid-Ask Quotes from Interbank market

    Market Participants estimates

    EFFAS-EBC meeting, June 2009

  • Data FilteringVisual comparison with historical yield curves, not historical market data

    EFFAS-EBC meeting, June 2009

  • Expert and Historical EstimatesIf too many entries are filtered out the data is augmented with expert estimates or historical values

    EFFAS-EBC meeting, June 2009

  • Hermite Polynomial FittingFix bonds maturity dates as grid nodesFit Hermite polynomial such that:a) Bond pricing equation holds

    b) Yield expert estimates are recovered

    EFFAS-EBC meeting, June 2009

  • Controversial results

    EFFAS-EBC meeting, June 2009

  • Current position:Chinese Bonds Market OverviewApplying EFFAS-EBC methodology to Chinese Bonds MarketZero-coupon yield curve used by CGSDTC

    EFFAS-EBC meeting, June 2009

  • Available dataChinabond has kindly supplied us with thefollowing data:

    Daily trading results.

    Daily OTC Bid/Ask quotes from 8 banks.

    EFFAS-EBC meeting, June 2009

  • Quotes co-Movement

    EFFAS-EBC meeting, June 2009

  • Bid-Ask Spread co-Movement

    EFFAS-EBC meeting, June 2009

  • Quotes: peculiaritiesData contains errors: Bid > AskData is inconsistent: Bids>Askk for several days in a rowQuoted YTM corresponds to smth slightly less than the Ask quoteBid-Ask spread is far too wide4 banks quote all bonds, 4 banks quote only a subset.

    EFFAS-EBC meeting, June 2009

  • Best inter-bank Bid-Ask spreads

    EFFAS-EBC meeting, June 2009

  • Quotes: Yield Curves

    EFFAS-EBC meeting, June 2009

  • Quotes: Forward Rates

    EFFAS-EBC meeting, June 2009

  • Quotes: (Bid+Ask)/2

    EFFAS-EBC meeting, June 2009

  • Quotes: SummaryDifferent banks use different quoting schemes: the way quotes move differs a lotEither quotes are non-committing or banks are isolated from each other: systematic arbitrage is presentNobody uses spot forward ratesBonds are likely to be quoted in groups by time to maturity (duration is not used)

    EFFAS-EBC meeting, June 2009

  • Prices: peculiaritiesHighly illiquid marketPrices may lie well outside Bid/Ask quotesSimilar bonds are frequently priced unlike each otherNo filtering helps since unusual prices tend to repeat in time

    EFFAS-EBC meeting, June 2009

  • Number of Deals

    EFFAS-EBC meeting, June 2009

  • Turnover

    EFFAS-EBC meeting, June 2009

  • Price vs. Bid-Ask

    EFFAS-EBC meeting, June 2009

  • Prices: Yield curves

    EFFAS-EBC meeting, June 2009

  • More smoothing

    EFFAS-EBC meeting, June 2009

  • High-Coupon Effect?Hypothesis: Chinese traders like high coupons (bonds with high coupons are valued higher). Testing: corr(coupon size, spread) = 10%

    EFFAS-EBC meeting, June 2009

  • Visual Coupons

    EFFAS-EBC meeting, June 2009

  • Prices: SummaryData from different sources are likely to be mixedYield curves should be constructed from quotesExtremely illiquid market, price information is unreliable

    EFFAS-EBC meeting, June 2009