Chinese bond market:
analysis of price information
Wang Jiang
State University Higher School of Economics
Moscow
Contents:
•
Chinese Bonds Market Overview
•
Zero-coupon yield curve used by China Government
Securities Depository Trust & Cleaning Co., Ltd
•
Applying EFFAS-EBC methodology to Chinese
bond market
2
Market overview
• About 3946 bonds with total worth 44 526,7
billion RMB issued since 1998
• Currently traded: 1912 bonds with outstanding
amount 18 508 billion RMB
• About 1000 transactions a day with average
daily turnaround about 160 billion RMB
• Bonds are traded at SSE, SZE, OTC and interbank markets
3
Market Structure
4
Market Structure
5
Billion
Outstanding Amount
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Source: http://www.chinabond.com.cn
6
Present Instruments
• Treasure Bonds (Ministry of Finance).
All terms. Bullet redemption. Majority has coupons.
• Central Bank Bills (Peoples Bank of China).
Very short and short term. Majority are discounted.
• Bonds Issued by Government-Owned Banks
All terms. Majority has coupons. Some have options.
• Corporate and Commercial Banks Bonds
• Others
7
Non-Governmental Credit Bonds
2009 Bond Issuance
Others
Commercial Banks…
Corporate Bonds
T-Bonds
Policy Banks Bonds
Central Bank Bills
Source: Chinabond
Non-Governmental Credit Bonds
0.33%
3.29%
18.23%
18.75%
13.50%
45.90%
Source: Wind Info
8
Current position:
•
Chinese Bonds Market Overview
•
Zero-coupon yield curve used by CGSDTC
•
Applying EFFAS-EBC methodology to Chinese
bond market
9
History of Yield Curves Development in China
Research Stage(1999-2001): The first treasury bond yield curve
was created under the Discounted Cash Flow (DCF) method.
Development Stage (2002-2005): Four yield curves, i.e. Inter-bank
Treasury Bond, Exchange Treasury Bond, Treasury Bond
(compounded) and Floating interest rate Treasury Bond, and Indices
for Treasury Bond (Inter-bank and Exchange) were worked out by
CGSDTC. The method of quadratic polynomial was adapted at this
stage .
Initial Application Stage (2006-now): CGSDTC has worked out a
wide variety of yield curves and indices; the study and analysis for
bond pricing are rapidly improved.
10
Chinabond yield curves structure
ChinaBond
Yield Curve
Inter-bank
Market
Treasury
Bond
Central Bank
Bill
Floating/
Fix Rate
Policy Bank
Bond
Floating/
Fix Rate
Corporate
Bond
Floating/
Fix Rate
Commercial
Bank
Bond
Floating/
Fix Rate
Commercial
Paper
ABS
Floating/
Fix Rate
China
Fixed-rate Treasury
Bond
Exchange
Market
Treasury
Bond
Corporate
Bond
11
CGSDTC Current Methodology
•
Data Filtering
•
Expert and Historical Estimates
•
Hermite Polynomial Fitting
12
Data Sources
•
Deals Prices from OTC, Shanghai and Shenzhen
Exchange markets
•
Bid – Ask Quotes from Interbank market
•
Market participants estimates
13
Data Filtering
In June 18, 2007 the data price contains T-bond 040007, YTM = 4.19, yield = 2.71%. The
yield is much lower than the last working day (June 15, 2007). With the same YTM
T-bond yield was 3.57% and 040007 is below the yield of 030007 (3.36%) with the YTM
= 3.175 years. So, this data is anomaly.
14
Hermite Polynomial Fitting
• Fix bonds maturity dates as grid nodes
x=
- YTM
• Fit Hermite polynomial such that:
a) Bond pricing equation holds
P – Bond price, A – Accumulative coupon income, F – Nominal bond price,
t – Moments coupon payment,
b) Yield expert estimates are recovered
15
Result of Matlab simulation
16
Current position:
•
Chinese Bonds Market Overview
•
Zero-coupon yield curve used by CGSDTC
•
Preliminary study of the Chinese bond market
17
Data Sources
•
Daily trading results
•
Bid – Ask Quotes from 8 banks:
Industrial and Commercial Bank of China
Agricultural Bank of China
Bank of China
China Construction Bank
Bank of Beijing
China Merchants Bank
China MinSheng Bank
Bank of Nanjing
18
Quotes co-Movement
19
Bid-Ask Spread co-Movement
20
Quotes: peculiarities
• Data contains errors: Bid > Ask
• Quoted YTM corresponds to smth slightly less
than the Ask quote
• Bid-Ask spread is far too wide
• 4 banks quote all bonds, 4 banks quote only a
subset.
21
“Best” inter-bank Bid-Ask spreads
22
Quotes: Yield Curves
EFFAS-EBC meeting, June 2009
23
Quotes: (Bid+Ask)/2
24
Quotes: Summary
• Different banks use different quoting schemes:
the way quotes move differs a lot
• Either quotes are non-committing or banks are
isolated from each other: systematic arbitrage
is present
• Bonds are likely to be quoted in groups by
time to maturity.
25
Prices: peculiarities
• Highly illiquid market
• Prices may lie well outside Bid/Ask quotes
• Similar bonds are frequently priced unlike
each other
• No filtering helps since “unusual” prices tend
to repeat in time
26
Number of Deals
27
Turnover
28
Price vs. Bid-Ask
29
Prices: Yield curves
30
More smoothing
31
Prices: Summary
• Data from different sources are likely to be
mixed
• Yield curves should be constructed from
quotes
• Extremely illiquid market, price information is
unreliable
32