Reform of China’s capital market is making robust progress and the market itself has grown into a sizeable entity in terms of its aggregate financing and market participants, reports Moody’s Investors Service.
“This market, driven by its own demands, is set to embrace greater growth opportunities as policymakers have defined its further development as one of their national strategies,” says Jenny Shi, a Moody’s managing director and country manager for China.
“By leveraging the experience of developed markets, combined with domestic characteristics and practices, the roadmap for the development of China’s capital market has been clearly outlined,” says Shi, who spoke on the release of a Moody’s report –
‘China’s Capital Market Poised for Further Growth as Reform Deepens’
– during the 2015 annual conference of the Boao Forum of March 26-29.
“This outline includes improving the regulatory mechanism and optimising resource allocation based on market demands, thus supporting economic growth and rebalancing, and better serving China’s overall national strategies.”
“However, with the liberalisation of interest rates and loosening control of capital flows to and from China, the country’s capital market has tended to become more volatile and more susceptible to trends in the global capital market; hence, risk management should be strengthened to cope with these challenges.”
Moody’s notes that China is trying to clearly define the roles of government and issuers and their relationships through state-owned enterprise (SOE) reforms and the establishment of a regional and local government (RLG) bond market.
It is also endeavouring to promote credit-based financing and investment to change expectations in regard to the concept of “implicit government for repayment”, and progress in this process will be gradual. Broad government support will also remain in place to prevent systematic risks in the near term.
During this current process of reform, the development of the RLG bond market, asset securitisation, internationalisation of renminbi (RMB) bonds, as well as interactions and connections between the domestic and overseas capital markets are all essential.
With RLG reform in particular, Moody’s notes that investors have been encouraged by the progress made to date in reforming local government financing since the State Council issued its debt management guidelines last October. In particular, the recently approved RMB1 trillion debt-for-bond swap for RLGs will significantly reduce their debt-service burden.
In the longer run, China could follow a managed pathway similar to Japan with the central government extending support to RLGs, says the report.
Alternatively, it could follow a more free-market approach similar to US where insolvent local governments generally declare bankruptcy, and either liquidate or reorganize with debt repayment plans. A third way, or a Chinese model, could also emerge, assuming various characteristics of both approaches.
“In summary, and in terms of China’s capital market as a whole, a more transparent, efficient multiple-tiered capital market system is now being built, while reforms promoting and perfecting the market are underway in an orderly manner,” says Shi.
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