By Wang Lan (China Daily)
Updated: 2007-12-03 10:46

But experts agree that much work needs to be done. They say that investor restrictions and a less-than-adequate credit rating system continue to hobble the growth of China's capital market.

For administrative reasons, corporate bonds issued under the CSRC regulation regime are initially traded on the stock exchange. This, in effect, has barred banks from trading in those bonds because they are not allowed to participate in the stock market.

In early October, the central bank suggested that the trading of corporate bonds could be expanded to the inter-bank market. This would help increase market liquidity, which would benefit both issuers of and investors in corporate bonds.

Analysts say intensive efforts should be made to bridge the stock exchange and the inter-bank market for all fixed-income securities.

The banking regulator recently issued a directive forbidding commercial banks from guaranteeing corporate bonds to ensure credit risks will not be borne by the banking system.

Analysts believe a well-established bond market calls for the trading in many corporate bonds with a range of credit ratings to better suit investors' varying risk appetites.

Bond experts also attribute the bond market inefficiency in part to a narrow investor base and an inadequate compensation scheme to protect investor interests.

It is widely seen by experts that a wider participation of institutional investors is necessary to boost liquidity, transparency and efficiency in the secondary market.

"The bond market cannot function properly unless it includes a wide range of institutions whose differing financial needs lead them to have varying buying and selling interests," says Zhao Xinge, a professor of finance at China Europe International Business School in Shanghai.

"China's bond market is in urgent need of a more diversified investor base, which should include not only commercial banks and insurance companies, but also securities companies and asset management companies," says Huang Dong, an analyst at Orient Securities.

Analysts say an active repo market, a widely accepted barometer of liquidity, will attract more institutional investors to participate in the market.

Latest figures released by the People's Bank of China show in the first three quarters of 2007, the turnover in the bond repo market amounted to a total of 31.7 trillion yuan, with the daily turnover averaged at 168.9 billion yuan, up 72.1 percent from the year earlier period.

China is a newcomer to the bond market. But industry experts say that arriving later offers some advantages, one most important of which is the rich international experience China can draw upon to establish its best practices relatively quickly.

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