PBC governor lists 12 mistakes in design for China's bond market development

At the "China Bond Market Development Summit" held on October 20, Zhou Xiaochuan, governor of the People's Bank of China (PBC), indicated that in the process of developing enterprise bonds in the past, China committed a host of fairly serious mistakes which later led to a "tumbling" in market construction and development, unable to recover after the setback. He made a profound analysis of 12 mistakes in the pre-stage development of China's bond market.

First, the quota of enterprise bond issuance and the number of bond-issuing enterprises were distributed in a planned way, the issuance of enterprise bonds was not determined in accordance with the market economic law. For example, the quota of enterprise bonds to be issued was distributed by the governments at different levels, the state distributed it to the provincial level and then distributed it down level by level.

Second, when the quota of enterprise bonds to be issued was put to administrative distribution, it usually followed the principle of "helping the poor", enterprise bond quota was regarded as a kind of relief distributed to qualitatively poor enterprises plagued with difficulties.

Third, the lack of a sound bond credit grading system made it impossible to give the investor an accurate assessment of the degree of risks.

Fourth, it was impossible to provide the investor with a revelation of information for making analysis.

Fifth, administrative price-fixing and control over price limits.

Sixth, according to the administrative requirement, in issuing bonds, the enterprise must have bank guarantee. Once the enterprise has got bank guarantee, enterprise bond is no longer of a typical sense.

Seventh, the issuance of bonds is oriented toward scattered households, which is unlike the practice of international corporate bonds oriented mainly toward institutional investors with analytical ability. Scattered households usually lack an adequate market analytical ability, their risk bearing capacity is also rather poor.

Eighth, effective market restraint system had not been established. Things like what enterprise bonds can be distributed out, what enterprise bonds cannot be distributed out, what should be the price, and what consequences would arise from the violation of a contract, should be determined by the market.

Ninth, no adequate education was given to investors. Many investors, to a great extent, regarded enterprise bonds as a variation of a deposit product.

Tenth, there was lack of a perfect "bankruptcy law". Under the current "Bankruptcy Law", "bankruptcy" cannot be employed as the last deterrent means to restrain the enterprise when it violates the contract, the right of the creditor as set in the "Bankruptcy Law" often cannot be properly protected.

Eleventh, the consignee's role was not correctly positioned. In the past, the cashing of consignment carried a strong color of planning and there was serious administrative interference, the consignee must act as an agent in managing the cash of consignment, and had to bear responsibility for failing to do so. And

Twelfth, on the question of handling the breach of contract by the issuer, administrative interference was even more serious. The contract-breaking act by the bond-issuing enterprise usually was not solved in accordance with the principle of market restriction.

Zhou Xiaochuan indicates that the setbacks and mistakes experienced in the past had their background characteristic of the times, the planned economy at that time carried a strong color of such, the thinking and environment related to a market economy had not been properly set up, now we must draw experiences and lessons. He said that the Decision of the CPC Central Committee on Some Questions Concerning Perfection of the Socialist Market Economic System adopted by the Third Plenum of the 16th Party Central Committee points to the need to expand direct raise of funds, to establish a multi-tier capital market system, actively expand the bond market, vigorously develop organizational investors. This is the orientation for market advance.

By People's Daily Online