Comprehensive risk management system in dire need to tackle challenges of bond market

Zong Jun, director of R&D center, China Central Depository & Clearing Co, LTD (CCDC), is delivering speech around risk control toward Chinese bond market. [Photo provided to chinadaily.com.cn]

In recent years, as the interest rate liberalization deepens, monetary policies transform and the scale of Chinese domestic bond market expands, risks also emerge more frequently which require regulators to come up with more targeted strategies to tackle them, said Zong Jun, director of R&D center, China Central Depository & Clearing Co, Ltd (CCDC).

Reports themed wth "Risks evaluation and control toward China’s bond market" and "The study on possibility that regarding social financing as the intermediate target of implementing China’s monetary policies" were released during a news conference hosted by CCDC.

Based on CCDC’s price index model, currently if the bench mark rate fluctuates 1 percent, accordingly the whole bond market value would fluctuate 24 billion yuan, which is almost twice the number of 2013. Also, if we look into the value at risk (VaR), there’s 95 percent possibility that up to 120 billion yuan of losses could occur in the bond market every day, all these indicators prove that the fluctuation in price has amplified.

Chinese bond market has experienced four rounds of bear market since 2009, during 2012 to 2013, the yield of 10 year Treasury bond has risen around 140 basis points (BP), which is 40 BP higher than previous two rounds, and the latest round of amplitude of fluctuation since 2016 has also reached over 100 BP. The abnormal fluctuation of bond yield usually happens after financial risks and tight liquidity period.

From the perspective of regulators, several countermeasures might work to tackle the increasing challenges that domestic bond market faced, said Zong. Given that the overall risks are still controllable and preventable, if managed properly, it’s predictable the sustainable growth in the long term could be achieved.

First, a comprehensive risk management system covering the whole chain is needed, which should include the identification, evaluation, precaution and management of risks. Second, building a coordination mechanism is also required, to facilitate the cooperation among fiscal, monetary and industrial policies, especially the organic combination between macro and micro prudential regulation in monetary policies. Third, incentive compatibility mechanism to combine the risks managements between government and market is in dire need. Fourth, it’s necessary to set bottom line mindset when mange the risks and expectation, especially when design policy anticipation aiming at solving potential problems in the long run.

CCDC’s report also suggests diversified instruments to protect the stability and disciplines in the currency market, like urge the primary dealers to perform their duties better as the stabilizer of the market; also use measures like canceling NPL (non-performing loan) after verification, debt to equity swap, equity financing, ABS (Asset-backed Securitization), acquisition and reorganization, or even bankruptcy liquidation, to de-leverage the bond market hence boost the healthy development of real economy.