Chinese Bond Market Challenges
Sergey N. Smirnov
State University Higher School of Economics
Moscow
Contents:
1
Chinese Bonds Market Overview
2
Zero-coupon yield curve used by CGSDTC
3
Applying EFFAS-EBC methodology to Chinese Bonds Market
EFFAS-EBC meeting, June 2009
2
Market scale
• About 3000 bonds with total worth 34 704,6
billion RMB issued since 1998
• Currently traded: 1385 bonds with outstanding
amount 16 600 billion RMB (rmb usd rate:
1 Chinese yuan = 0.15 U.S. Dollars)
• About 1000 transactions a day with average
daily turnaround about 150 billion RMB
• Bonds are traded at Shanghai and Shenzhen
exchanges, OTC and inter-bank markets
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3
Chinese Bonds Market Structure
Source: ChinaBond
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Chinese Bonds Market Structure
Source: ChinaBond
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Market Infrastructure
• The primary market of bond issuance is largely
completed through syndication.
• Governmental bonds were mostly underwritten by the
four stated-owned banks while other commercial
banks and securities companies play active role in
forming syndicate to market financial and corporate
bonds.
• Most of bonds are held by banks, insurance
companies, securities firms, and corporations. Mutual
funds hold a relatively small fraction of the total
outstanding bonds.
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Instruments Present
• 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.
• Government owned Banks
All terms. Majority has coupons. Some have options.
• Corporate and Commercial Banks Bonds
• Others
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Outstanding Amount
180000
160000
140000
100000
80000
60000
40000
20000
Treasure Bond
Central Bank Bills
Government ow ned banks Bonds
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09
M
ay
20
09
Ja
n
20
08
Ju
l
20
08
Ja
n
20
07
Ju
l
20
07
Ja
n
20
06
Ju
l
20
06
Ja
n
20
05
Ju
l
20
05
0
Ja
n
100 million RMB
120000
Corporate Bonds
Others
8
Current position:
1
Chinese Bonds Market Overview
2
Zero-coupon yield curve used by CGSDTC
3
Applying EFFAS-EBC methodology to Chinese Bonds Market
EFFAS-EBC meeting, June 2009
9
History of Zero-Coupon Yield Curves
Development in China
• Research (1999-2001).
With aid of Reuters was developed first yield curve for Treasure
bonds
• Prototypes (2002-2005).
Chinese development of 4 yield curves for Treasure bonds using
information from different markets
• Exploitation and Modification (2006 Present).
New methods are developed and yield curves are constructed for
different types of bonds.
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CGSDTC Methodology
• Data Filtering
• Expert and Historical Estimates
• Hermite Polynomial Fitting
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Data Sources
• Deals Prices from Interbank, OTC and
Shanghai Exchange markets
• Bid-Ask Quotes from Interbank market
• Market Participants estimates
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Data Filtering
Visual comparison with historical yield curves,
not historical market data
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Expert and Historical Estimates
If too many entries are filtered out the data is
augmented with expert estimates or historical
values
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Hermite Polynomial Fitting
• Fix bonds maturity dates as grid nodes
• Fit Hermite polynomial such that:
a) Bond pricing equation holds
b) Yield expert estimates are recovered
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Controversial results
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Current position:
1
Chinese Bonds Market Overview
2
Zero-coupon yield curve used by CGSDTC
3
Applying EFFAS-EBC methodology to Chinese Bonds Market
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17
Available data
Chinabond has kindly supplied us with the
following data:
– Daily trading results.
– Daily OTC Bid/Ask quotes from 8 banks.
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Quotes co-Movement
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Bid-Ask Spread co-Movement
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Quotes: peculiarities
• Data contains errors: Bid > Ask
• Data is inconsistent: Bids>Askk for several
days in a row
• 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.
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“Best” inter-bank Bid-Ask spreads
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Quotes: Yield Curves
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Quotes: Forward Rates
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Quotes: (Bid+Ask)/2
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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
• Nobody uses spot forward rates
• Bonds are likely to be quoted in groups by
time to maturity (duration is not used)
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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
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Number of Deals
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Turnover
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Price vs. Bid-Ask
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Prices: Yield curves
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More smoothing
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High-Coupon Effect?
• Hypothesis: Chinese
traders like high
coupons (bonds with
high coupons are
valued higher).
• Testing: corr(coupon
size, spread) = 10%
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Visual Coupons
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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
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