The Research On Credit Spread Of Commercial Paper (CP) In China

Commercial Paper (CP)appeared in the financial markets of China as early as1988, and faded out from our viewfor some reasons in1997.The People’s Bank of China (PBC) issued "the Administrative Regulations on the Commercial Paper" in5-23-2005, marking the market of CP arisen. In4-9-2008, the PBC issued "the Administrative Regulations on the Instruments of Debt Financing of Non-financial Enterprises in the Inter-bank Bond Market", and the issuance system of CP became the registration system, managed by the association of inter-bank market dealers, which was more market-oriented and efficient. In2010, the Association issued a sort of CP, whose duration was not more than270days; the credit qualification of CPs issuing enterprise was higher the AAA, and the issue of this kind of CP enriched the market of CP. After the rapid development of more than6years, CP has become the most popular product in credit debts.The rapid development of CP in these6years is the result of CP meeting the needs of Chinese businesses and financial markets, enriching the domain of short-term liabilities. In these years, the domestic bond market expands, and especially, the bond of state-owned enterprise is closed to the40%of net asset, which is the upper limit stipulated by "securities law". As a result, the credit qualification of CP issuing enterprise decline gradually, and credit default form and accumulate.Although make-marketing system and brokerage firms were introduced in recent years, the trading more active than before, liquidity problem was still a problem of bond market of China, because of the lack of market investors. The research of CP traditionally focused on the credit risk premium, but in this dissertation, I supposed the liquidity of CP in the secondary market influenced the price in the primary market. Thus, to ensure the accuracy of the research, liquidity risk was also introduced in this dissertation. The liquidity is measured by the CP itself characteristic, the activity of the secondary market and the status of monetary market.In this paper, the issue price of CP decomposed into three parts, namely the issue interest rate=base rate+credit risk premium+liquidity risk premium. The purposes of the paper is to provide the market participants the basis of investment and financing decisions through helping them better to understand the factors affecting CPs’credit spreads.In order to measure the risk premium of CP better, the paper firstly made a comparative analysis among the three base rates, SHIBOR, bond yields and the yields of central bank bills, those selected by domestic and foreign scholars when they studied on the pricing of CP. Both theoretical analysis and simple correlation analysis confirmed that SHIBOR is indeed a better indicator to be the benchmark interest rate of CP’s credit spreads. Therefore, we selected SHIBOR as the benchmark interest rate in our following study. We stripped out the credit spread of CP through SHIBOR, and have an in-depth research on the affecting factor of credit spread.There has not an real sense of default event in CP market of China up to now because of the existence of the implicit guarantee of the commercial banks, so this paper draws on the idea of the traditional measurement model of credit spreads, Z-score, mixing the affecting factors of modern measurement model and some financial indicators, to establish the credit spreads model of CP’s pricing.The empirical analysis shows that the macroeconomic variables such as GDP and CPI, the rating, ownership, regional attributes of issuers and the financial indicators such as net operating cash flow/total debt, debt ratio, current ratio and net assets yield, as well as the seven days of the inter-bank collateral repo rate and turnover rate have a significant effect on the credit spreads. Specifically, the most important factor affecting the credit risk is the rating of issuers, and then the solvency indicators. Liquidity risk of CP is mainly affected by money market funds face and secondary market liquidity, but we still think issue size is indeed an important factor affecting liquidity risk although it is eventually kicked out of the model, the reason it is not appeared in our model is only because it has a correlation with the rating of issuers.In general, there are many factors those affect the credit spread of CP, but the key factors investors concerned about are micro-level factors, including the qualification of bond itself and the issuer, while other factors only has a certain degree of influence on the credit spreads.