Study Of China's Corporate Bond Market

The subject of this article is China's corporate bond market. The corporate bond market is the place where corporate bonds are issued, circulated and redeemed. According to Article 5 of the Regulation of Corporate Bonds, the corporate bond refers to the security which is issued in accordance with the legal formalities and which will be repaid with principle and accrued interest at the end of the specified period. In this article, corporate bond market in US is cited in comparison with the market in China. The article begins with the history and present situation of China's bond market. With the analysis of the problems inherent in the market, readers will get a deep insight into the market. The corporate bond market in US is also analyzed so that we can learn the experiences of the developed markets. Furthermore, debt financing is compared with equity financing and advantages of corporate bond market are explained, and we get to the conclusion that it is urgent to develop China's corporate bond market. Finally, several suggestions are listed with regard to the development of China's corporate bond market.China's corporate bond market is still young. It has gone through the phases of early development, recession and regulation. The development cycle was highly related to the corresponding laws and regulations. On one hand, the reform of the economic system and enterprises has necessitated the development of corporate bond market. On the other hand, due to macro factors such as policy constrains and micro factors such as enterprises management problems, the market is far from mature. In terms of macro factors, the regulation of corporate bond market is still plan-oriented, and treasury bond market and stock market obviously enjoy policy preferences compared to the corporate bond market. Besides, irrational interest rate structure, developing financial market, little investor protection and low quality of law enforcement have retarded the market development. In terms of micro factors, high debt/equity ratio and low operation efficiencyhave constrained the enterprises from further borrowing, as a consequence, bond has not been the primary financing vehicle yet. Laws and regulations on enterprise bankruptcy are far from complete, so it is practically difficult for enterprises to go bankrupt. As a result, some enterprises not only default on their bank loans but also force the banks to extend the loan, which leads to the even higher debt/equity ratio of enterprises at large. Lack of supervision leads to high moral risk on the part of borrower, while under the managed interest rate system, the borrowing cost of enterprises does not increase as their credit ratings deteriorate. At the same time, the prevailing practice of default on debt hampers the development of corporate bond market and bond issuance has not been the major source of finance. Through comparative analysis of U.S. corporate bond market, it is concluded that from the perspective of maximization of shareholder's interest, management team selects to increase equity, optimize capital structure and decrease borrowing cost through issuing more debt instruments. Because lending capacity of banks decreases due to high ratio of non-performing loans, companies utilize bonds for the leverage effect. Market liberalization and deregulation, low level of interest rate and enhanced market efficiency bolster the bond market and bond issuance has become the major source of capital. The history of US bond market provides us with some useful experiences, and detailed analysis of it will give us a better understanding of corporate bond market. It is worth mentioning that when the lending capacity of banks was affected by the increased non-performing loans, bond market experienced fast growth. This experience can help us with the problems faced by SOEs and small to medium-sized high-tech enterprises regarding financing. In the long run, only with the transition of government body's regulation system can China's corporate bond market grow fast. In the meantime, i...