The Reform of the Bond Markets in Mainland China and Coordination Strategy of Taiwanese Financial Industry 

Abstract:

Mainland China is now heading toward marketization and liberalization. Chinese bond markets and the operation environments of related industries are more complicated than before, which leads to more and more difficulty on investments and operations. This project explores the reform of Chinese bond markets and the possible impacts after that. Current participation of Taiwanese financial institutions in Chinese bond markets and related impacts, including problems, risks, and opportunities, as well as resolutions are also discussed. At last, the opportunities and challenges of the offshore Renminbi market in Taiwan and the according response are raised. 

In summary, some suggestions from five aspects are raised as follows. 

1. To consider to develop buyer rating systems Buyer rating is also referred to as unsolicited rating, which is commonly more conservative than solicited rating. Thus, we may consider less strict criterion for companies rated by buyer rating agencies. Consequently, investors, such as banks and insurance companies, can use this type of ratings to calculate their capital adequacy ratio and risky based capital, respectively. 

2. To encourage developing Taiwan entrepreneurs’ asset related securitization business To effectively utilize sufficient Taiwan funding, we can develop Taiwan entrepreneurs’ asset related securitization business, which will be helpful in ensuring Taiwan entrepreneurs to acquire capital with lower costs. 

3. To enhance the market liquidity of the Formosa bonds There are several ways to enhance market liquidity of Formosa bonds. First, try to adjust Taiwan bond markets’ settlement time to be consistent with that of Hong Kong. Second, in the light of Honk Kong Monetary Authority’s using Din sum bond as a guarantee to provide liquidity supplement in the CNH market, Taiwan central bank can follow suit. Thirdly, to diversify the types of bond, infrastructure related bonds and the bonds based on large Chinese state-owned enterprises' or Taiwan enterprises' asset related securitization, for instance, can be launched with priority. 

4. To establish alternative evaluations We consider both external and internal evaluations. In terms of external evaluation, our financial association can invite some independent experienced research team to evaluate Chinese enterprises. Also, Taiwan can establish its own rating companies. Once Taiwan has a qualified rating agency, risky weight used in calculating capital adequacy ratio is likely to be less than 100%, which is the weight for non-rating company. With respect to internal evaluation, banks can establish their own research team to evaluate Chines enterprises’ safety and soundness. 

5. To remind Taiwan investors to pay attention to related risk Have to remind Taiwan investors to tightly pay attention to the risk of policy, interest rate, and exchange rate in Mainland China. 

With regard to policy risk, some cases have shown that the Chinese government has gradually eliminated no bankruptcy guarantee for state-owned enterprises. 

As to interest rate risk, the deregulation on interest rate will probably cause strict competition among financial institutions and then trigger financial instability, which will subsequently increase the risk of the investments in the bond markets in Mainland China. 

Finally, the internationalization of the Chinese yuan Renminbi will enlarge the volatility range and the risk of the Renminbi rate, which will also increase the risk of the investments in the bond markets in Mainland China.