3月29日，《China Daily》刊发我院副院长朱宁教授的专栏文章，朱宁教授在文中指出，中国金融改革需要寻找最佳的解决方案，而债券市场的繁荣或将成为解决中国经济大部分症结的良方。

Finding an optimal solution

Flourishing bond market has the answers to most of China's economic ailments

The recent surge in housing prices across many cities and the subsequent changes in real estate restrictions have drawn fresh attention to China's attempts to reorient its economic growth model, and have also raised the stakes for further reforms and relaxation in the finance sector.

To be fair, financial sector reform has been the cornerstone of many important economic events in China during the past year. Some of them that come to mind immediately are financing problems faced by small and medium-sized companies, local government finances, trust investments, rising real estate prices and excessive volatility in the capital markets. It is no surprise that all of these seem closely related to the financial sector. Domestic and international experts are unanimous in their view that reforms in the Chinese financial sector are the key to further economic reform in China for the next few decades.

At the same time, one must understand that financial reforms in China are not only a huge and complex task, but a systematic one also. The market-determined interest rate, the internationalization of the yuan (the usage and clearing of yuan overseas), and the opening up of capital account flows, are often considered major tasks in the next round of financial reforms.

There are some important items on the reform agenda, including the deregulation of some financial markets; the launch of financial innovation products; investor protection and improvement of corporate governance; and Chinese domestic investors accessing overseas markets.

What policymakers, academia and practitioners have all spent considerable amount of time and failed to reach a consensus is the timetable and road map for the reform. Given the complex nature of the financial reform and the dynamic international and economic backdrop, experts seem to have spent considerable amount of time and energy in finding the optimal solution.

The debates have taken so long to culminate that all parties are unanimous in opinion that as long as concrete progress can be made in a consistent and orderly way, reform and development in certain areas earlier can eventually push through reform in many other areas.

In this context, the development of the bond market is an attractive proposition that will potentially push forward reform in many other areas.

A more developed and liquid treasury bond market is particularly important, as the treasury market sets the benchmark rate and credit worthiness for all other fixed income market in China. The relative size of issuance and trading volume is still small at the moment, compared to other developed economies. The secondary market remains relatively illiquid, as opposed to the situation in the A-share market.

Even with the National Association of Financial Market Institutional Investors making up some of the gaps in the secondary market of the treasuries, more work has to be done to encourage trading and for proper pricing of Chinese treasury bonds. Based on international experience, the introduction of treasury futures and option contracts will help the formation of a market-determined interest rate. If international experiences were to repeat in China, the rumored introduction of the treasury futures may show some promise in solving the lack of liquidity problem in the Chinese bond market.

With the development of the treasury market, the bond market will be blessed with improved liquidity, pricing stability, and an expanded investor base. All such conditions may ultimately pave the way to a more developed and integrated corporate bond market. At the moment, the People's Bank of China, the National Development and Reform Commission, and the China Securities Regulatory Commission are regulating various segments of the corporate bond market separately. Such separate regulation unnecessarily causes market segmentation, which creates information disclosure asymmetry and regulatory arbitrage. These segmentations also cause low liquidity in each of the three secondary markets and in turn dampen interest in issuance in the respective primary bond market.

It is worth noting that at present, only companies with the highest credit ratings can participate in the corporate bond market. One important function of the corporate bond market is to provide pricing for credit worthiness. Consequently, only by allowing companies with different credit worthiness to participate in the corporate bond market can investors evaluate and express their opinion about different companies and different levels of credit worthiness.

Such pricing and control will help Chinese companies realize the value of financial responsibility and sustainability and motivate listed companies to improve their corporate governance and investor relations. The recent launch of a high yield bond market partly reflects CSRC's awareness of and determination to tackle the problem.

At the same time, municipal government bonds, another type of bond widely used to solve local governments' financing problem, will provide direct and feasible solutions to many of the challenges faced by local governments, such as shrinking fiscal income and mounting debts.

With local governments resorting to these bonds for financing, local governments have to disclose more information on their budgetary plans and information to investors. Such disclosures will not only provide investors with the necessary confidence to invest in such governmental obligations, but also impose effective checks and monitoring over local governments' fiscal decisions.

In some sense, the development of the local bond market may eventually help solve local governments' financing problems, dampen their motivation to push up land prices and sell off more land, and indirectly cap China's skyrocketing housing prices.

Several provincial governments in the coastal region have gained approval to issue local government bonds in the past couple of years. However, similar to the situation in the corporate bond market, only by allowing governments with different credit worthiness into the municipal bond market can the market be truly effective in pricing local governments' fiscal soundness and motivating local governments in achieving fiscal sustainability.

As a result, more local governments, especially those facing potential fiscal problems, should be welcome to join the municipal government bond market. Such a market may prove to not only solve the local governments' debt problem, but also manage risks for many other stakeholders in the financial sector.

Hence, the development of the bond market will be instrumental in helping achieve the market-determined interest rate, which will further help the relaxation of capital account capital flows and cross-border usage and clearing of the yuan. When the yuan becomes a truly international currency, it may become opportune for capital to flow freely across borders and China to fully integrate into the global financial system.

Needless to say, the easy access to the international capital markets and ability to manage risks in a global context, will add wings to Chinese companies dedicated to expanding and growing in the global market by that time.

Further, the development of the bond market may inadvertently solve many of the problems facing the Chinese A-share equity market. As bonds become a more viable financing option, Chinese companies will no longer be pushed through the narrow drawbridge of IPOs and SEOs for equity financing. Also, with the competition of the bond market as an alternative financing vehicle, the pent up demand for IPOs should ease, and so would the over-pricing and excessive valuation for IPO deals.

With the pricing reverting back to sustainable levels in the primary market, the secondary equity market will become more stable and attract long-term investment accordingly.

With more information being disclosed through bond issuance and transactions, companies with bond or stock issuance would face higher corporate governance expectations. If the companies with listed equities cannot improve their governance and investor protection, investors, especially retail investors who face greater level of information asymmetry, may choose to vote with their feet and switch from the equities market to the bond market. Through such a mechanism, the bond market may impose some credible threats to listed companies to curb related-party transactions and tunneling dealings, which have been undermining investor confidence in the A-share market in the past.

Last but certainly not the least, a mature and developed bond market will provide various investment products to Chinese investors. With the ageing of the Chinese population, Chinese investors, especially retail ones, will soon demand more investment channels and products with safer return-to-risk tradeoffs. Once investors can obtain moderate and steady returns by investing in the bond market, Chinese residents will naturally allocate less of their assets into the highly volatile A-share market or the prohibitive real estate market. As a result, the A-share equity market and housing market will reveal long-term investment value and Chinese investors' portfolios will generate more wealth for Chinese households.

The author is deputy director of the Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University. The views do not necessarily reflect those of China Daily.

Finding an optimal solution