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Deepening of reform fosters interbank bond sector
By Liu Linan |
April 8, 2013, Monday
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Print Edition
Print Edition
THE recent regulatory changes by key financial regulators are strong signals that China intends to continue to pursue financial market liberalization reforms under the new leadership.
We expect deepening of financial market deregulation to drive potentially strong growth in the fixed income investment demand by both domestic and foreign institutional investors.
With further penetration into the domestic bond market by a much broader and multi-layered institutional investor base, we expect a more balanced demand structure to foster the development of the domestic interbank bond market. Specifically, we expect the following changes in the investor landscape on the interbank bond market.
Commercial banks will remain the top investor in the interbank bond market. However, as domestic interest rates become more liberalized, the traditional interest-related business will suffer from narrowing margins, and we expect commercial banks to explore more fee-based business through expanding wealth management services and investment management services.
If we assume 20 percent year-on-year growth of banks' wealth management business, the total market will grow to 15.8 trillion yuan (US$2.54 billion) by the end of 2016.
Such a potential shift in strategic asset allocation suggests that commercial banks' investment in central government bonds and policy bank bonds is more likely to decline in the next five years to below 50 percent of the total market share, according to our forecast. Correspondingly, banks' investment in the credit market will likely triple from where they were in 2012 (2.35 trillion yuan in credit bond holdings in 2012), which implies commercial banks will absorb roughly 40 percent of the net supply of credit bonds in the next four years.
We expect China's domestic fund management industry to take off and to gradually replace the so-called "shadow banking" market and other irregular financing activities.
We forecast fund companies' investment in the interbank bond market to grow at an average annual rate of 25 percent from 2.3 trillion yuan in 2012 to 5.5 trillion yuan by 2016.
We expect fund companies to increase their allocation to the credit market to somewhere between 65 and 70 percent of their portfolio, which translates into demand of about 20 percent of the net supply in the credit market.
Insurance companies will play an increasingly important role in the domestic bond market thanks to a series of policy initiatives to relax the investment restrictions on insurance companies to invest in the credit bond market.
We expect about two-thirds of the assets under management to be invested in fixed income products. We assume if allocation of the incremental assets to the credit market at 60 percent, insurance companies' demand for the credit market will be about 23 percent of the net credit bond supply.
We expect domestic pension funds and social security funds to become more active participants in the interbank bond market.
At an assumed 15 percent annual growth rate of assets under management by pension funds or social security funds, we forecast about 500 billion yuan allocation to the interbank bond market by 2016.
As the capital account is gradually liberalized over the next three to five years, we expect an additional US$20 billion annual quota to be granted to Qualified Foreign Institutional Investors and an annual 150 to 200 billion yuan quota for foreign institutional investors to access the interbank bond market.
This will bring the openness of China's interbank bond market to roughly 6 percent of the total bond market from 1.5 percent at present.
This represents 700 billion yuan demand by foreign investors on the interbank bond market, and we project roughly 50 percent of which will be invested in the credit market.
We expect deepening of financial market deregulation to drive potentially strong growth in the fixed income investment demand by both domestic and foreign institutional investors.
With further penetration into the domestic bond market by a much broader and multi-layered institutional investor base, we expect a more balanced demand structure to foster the development of the domestic interbank bond market. Specifically, we expect the following changes in the investor landscape on the interbank bond market.
Commercial banks will remain the top investor in the interbank bond market. However, as domestic interest rates become more liberalized, the traditional interest-related business will suffer from narrowing margins, and we expect commercial banks to explore more fee-based business through expanding wealth management services and investment management services.
If we assume 20 percent year-on-year growth of banks' wealth management business, the total market will grow to 15.8 trillion yuan (US$2.54 billion) by the end of 2016.
Such a potential shift in strategic asset allocation suggests that commercial banks' investment in central government bonds and policy bank bonds is more likely to decline in the next five years to below 50 percent of the total market share, according to our forecast. Correspondingly, banks' investment in the credit market will likely triple from where they were in 2012 (2.35 trillion yuan in credit bond holdings in 2012), which implies commercial banks will absorb roughly 40 percent of the net supply of credit bonds in the next four years.
We expect China's domestic fund management industry to take off and to gradually replace the so-called "shadow banking" market and other irregular financing activities.
We forecast fund companies' investment in the interbank bond market to grow at an average annual rate of 25 percent from 2.3 trillion yuan in 2012 to 5.5 trillion yuan by 2016.
We expect fund companies to increase their allocation to the credit market to somewhere between 65 and 70 percent of their portfolio, which translates into demand of about 20 percent of the net supply in the credit market.
Insurance companies will play an increasingly important role in the domestic bond market thanks to a series of policy initiatives to relax the investment restrictions on insurance companies to invest in the credit bond market.
We expect about two-thirds of the assets under management to be invested in fixed income products. We assume if allocation of the incremental assets to the credit market at 60 percent, insurance companies' demand for the credit market will be about 23 percent of the net credit bond supply.
We expect domestic pension funds and social security funds to become more active participants in the interbank bond market.
At an assumed 15 percent annual growth rate of assets under management by pension funds or social security funds, we forecast about 500 billion yuan allocation to the interbank bond market by 2016.
As the capital account is gradually liberalized over the next three to five years, we expect an additional US$20 billion annual quota to be granted to Qualified Foreign Institutional Investors and an annual 150 to 200 billion yuan quota for foreign institutional investors to access the interbank bond market.
This will bring the openness of China's interbank bond market to roughly 6 percent of the total bond market from 1.5 percent at present.
This represents 700 billion yuan demand by foreign investors on the interbank bond market, and we project roughly 50 percent of which will be invested in the credit market.
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