The dramatic changes in the banking sector and the much hyped fluctuations in the stock market in the past few years may have created the impression that these are the two most important areas of the financial market.

For banking, the answer is definitely yes. But not necessarily for the stock market.

The market for corporate bonds, which is probably the most underdeveloped among all the areas in China's financial industry, should be a more important venue for fundraising and investment.

It is high time to strengthen this weak link.

In any mature market economy, the amount of money raised by the corporate bond market is at least a few times greater than that of the stock market. Last year in this country, however, funds raised via corporate bond flotation were only 44 percent the size of the capital raised through share issuance.

And one should not forget that China's stock market is small relative to the size of China's economy and its banking industry.

The result is the business world's unhealthy over-reliance on the banks, which are responsible for 90 percent of enterprises' funding needs.

A fragmented regulatory mechanism has been a key culprit for the lagging corporate bond market.

For years, the power to regulate the corporate bond market has been shared by the National Development and Reform Commission (NDRC), the People's Bank of China (the central bank) and the China Securities Regulatory Commission (CSRC), with the NDRC playing the dominant role.

But the three have often been at odds over how to develop and regulate this market, which has stalled development.

The central government has reportedly decided to make the CSRC the sole regulatory body for the corporate bond market. This initiative will remove a major obstacle in corporate bond market development.

What is desperately needed next will be some independent, well-functioning credit-rating agencies. They will play a critical role in evaluating bond issuers' financial strength and provide reference for regulators and investors.

The CSRC should also consider extending the scope for the use of funds raised through corporate bonds.

Currently, only bonds for infrastructure and some promising industrial projects can be approved. The money should also be usable for such purposes as asset restructuring, mergers and acquisitions, and technology renovation.

Source: China Daily