A Study On Institutional Bottleneck And Institutional Innovation Of China's Corporate Bond Market

From perspective of financial markets shaped by enterprise external financing channels, there is a triangle relationship of equal importance among corporate bond, stock market and bank loan in those mature market economies. As the key component of the capital markets, the development of corporate bond market will enable enterprises to achieve their optimal capital structures in the course of development so as to realize the goal of value maximization; such development will further satisfy different needs of investment from investors of various types of risk-taking and preferences, so that assets can be efficiently allocated. Corporate bond has its comparative advantage over other sort of financial assets in consideration of its collective investor supervision mechanism as well as constraint of rigid rules of repayment of capital and interest. Therefore, in most market economies such as USA, the weight of corporate bond would be even greater than equity-financing in views of both the national financial market system and the corporate level. However, corporate bond is currently playing quite an unimportant role in the financial system in China. This dissertation will study on the corporate bond markets by employing theories of Institutional Economics to explore its development issues. Specifically, this dissertation will start from perspectives of supply, demand and market circulation of corporate bonds, then provide an explanation to the institutional constraints of corporate bonds field through approaches of financial systems, supervision patterns, credit systems and cultures. The author will finally suggest the relevant measures of improvement.It is illustrated by the theory of Capital Structure that corporate bond enjoys prominent advantages in reducing comprehensive capital costs and in dealing with Principal-Agent problems in modern enterprises through mechanism such as disclosure of information. Moreover, corporate bond markets will be useful in declining macro-finance risks then facilitating economic growth. Therefore, its status shall be much more superior to bank loans and stocks in mature market economic systems. This is one of the reasons why China is in need of great efforts in pushing forward the development of corporate bonds. Of course, corporate bond can also be very helpful in promoting the reform of state-owned enterprise as well as eliminating potentiality of financial risks. However, the research outcomes of this dissertation illustrates that there is no statistical regulations between the corporate bond markets and other economic variables such as GDP, CPI,interest rate, credits , the scale of stock market. Accordingly, the author concludes that the backward situation of the corporate bond market in China is mainly a result of the institutional bottleneck in this regard.Furthermore, the author explores thus institutional bottle-neck by mechanism of supply and demand from perspectives of external and internal situation of the enterprise, formal and informal institutions, institutional environments, institutional arrangement and devices. It is found out that the most serious impacts imposed on the corporate bond market would be the constraints on the supply by the institutional environment. Though the government has gained great successes in the reforms of the banking system and stock markets even a period of regulation and control was experienced, the corporate bond is still under over-regulation. It is argued in this dissertation that in order to facilitate the development of credit, bonds and stock markets, the government has imposed strict regulations upon corporate bond regarding the issuing scale, interest rate, maturity, utility and issuers which has become main reasons of a small supply of the corporate bonds. Factors impacting supply also impact the demand situation with unique features per se. Intentionally, the government has designed relevant institutions to attract surplus household capitals to flow to the state-owned banks which it preferred and stock markets which may well demonstrate the government intentions. It is obvious that credit risks have been initiated by entry barriers for institutional investors such as commercial banks, dual taxation, low interest rate, low liquidity, and defect protection system to bond holders. This has also declined the expected revenue of the corporate bonds which has constrained the development of corporate bond market from demand side point of view.Obviously, factors which impact supply and demand will influence the circulation market. However, the defects of institutional designs of the government in the fields of exchange and circulation have worsened the corporate bond markets and its liquidity. Issues in the primary market such as small issuing scale, single ways of issue and underwrite have aversely constrained the development of the secondary markets. However, the situation is a bit better in the secondary markets where many bottle-necks are broken through. Nevertheless, institutions have great impacts on economic variables such as coupons, listing decisions, maturities, earning fluctuation, earning disperse, number of market participants, lost of prices etc.. The market liquidity will hence be influenced. It is found out that the liquidity is decreased because of the absence of market-maker, the separation between settlements and entrust system, the regulations on institutional investors, the monotony of mode of exchange and the variety bonds.With positive externalities, finance infrastructures are quite fundamental for the development of corporate bonds. Institutions such as competitive finance systems, efficiency-oriented and investor-benefit-oriented supervision systems, legal protection to creditors, credit cultures which foster healthy implementation of formal institutions, restrictions on relationship between politicians and merchants, covenants and traditions to foster social forces etc. are all indispensable for development of the corporate binds. The deficiency of finance infrastructure has resulted in the laggard development of the Chinese corporate bond market..While carrying out a thorough analysis on the institutional issues of supply, demand, liquidity and finance infrastructure, the author finally puts forth relevant suggestions on the innovation of institutions.