Chinese Bond Market Research Articles

VIX’s Impact on Chinese Corporate Bond Default

In recent year, Chinese corporate bond default rate continues to grow. Besides international and domestic affects, infection of external risks could cause changes in Chinese corporate bond market. Regarding this issue, this paper investigates the systematic mechanism of global risk infection through the study of VIX’s impact on Chinese Corporate bond default. More specifically, this paper uses VIX index to measures the global risk, and separately use the amount and dollar amount of Chinese corporate bond default rate to measure the condition of the Chinese corporate bond market. The findings of this study show that the default index rises with the increase of the VIX index.

The Bright Side of Financial Constraint on Corporate Innovation: Evidence from the Chinese Bond Market

This paper provides evidence supporting the positive effect of financial constraints on firms’ innovation outputs, using the break of rigid payment in the Chinese bond market as a shock to financial constraints. To illustrate the underlying mechanisms, we verify that financial constraints can improve firms’ innovative efficiency, both from the perspective of researchers and R&D investments. Further, the basic effect is more pronounced when the supply of researchers is abundant and when the agency problem in utilizing capital is severe. We document the positive correlation between breaking rigid payment and financial constraints, to support the validity of the setting.

Controlling Shareholder Characteristics and Corporate Debt Default Risk: Evidence Based on Machine Learning

ABSTRACT The influence of controlling shareholder characteristics on corporate risk has been a popular topic for discussion in academic and theoretical circles. However, current research lacks systematic and quantitative conclusions based on predictive ability, as it only focuses on the causal relationship between a single characteristic of the controlling shareholder and corporate risk. This paper utilizes the back propagation neural network based on gray wolf algorithm (GWO-BP) method in the machine learning algorithm for the first time and takes the listed companies that publicly issue bonds in the Chinese bond market as a research sample. It summarizes the qualities of controlling shareholders from the perspective of controlling shareholders’ risk-taking and benefits expropriation and examines multi-dimensional controlling shareholder characteristics for predicting the debt default risk of companies. This research established that: (1) Overall, the characteristics of controlling shareholders can improve the ability to predict the debt default of a company; (2) The features of the investment portfolio of the controlling shareholder have a higher degree of predicting the debt default risk of a company,while the properties of equity structure and related transactions have a lower degree of predicting the risk of corporate debt default.This research not only uses machine learning methods to study controlling shareholders in China from a more comprehensive perspective but also provides a useful incentive for bondholders to protect their interests.

Is idiosyncratic tail risk priced in the cross-section of bond returns? –Evidence from Chinese bond markets

ABSTRACT This article investigates for the first time the role of idiosyncratic tail risk in the cross-sectional pricing of bond returns. We use the idiosyncratic return of the bond to measure the idiosyncratic tail risk based on the extreme value theory. The results show that bonds in the highest idiosyncratic tail risk quintile generate 3.5% more annual return compared to bonds in the lowest idiosyncratic tail risk quintile. In addition, we found that idiosyncratic tail risk is cross-sectionally positive correlated with bond expected returns in Chinese bond market, even when the downside risk, bond rating, liquidity, size, maturity, bond market beta, short-term reversals, and coupon rate are controlled. The positive correlation is in line with the traditional risk-return tradeoff theory. Because of their aversion to extreme losses, investors are willing to accept the low returns from low idiosyncratic tail risk bonds.

Dividend commitment and bond yields: An examination of wealth transfer effects

This paper examines a new type of corporate governance mechanism that has emerged in China, namely, dividend commitment, and documents its wealth transfer effects on bond yields. We find the larger-commitment group exhibits greater bond yields than the smaller-commitment group. Further analysis reveals that bondholders pay more attention to the wealth transfer effects when government bailouts are not available, when investing in exchange-traded bonds, and when other guarantees are not offered. This study sheds light on the effects of a unique governance mechanism in the Chinese bond market and contributes to the literature on global finance and corporate governance.

The Chinese Government Bond Markets: Foreign Investments and Market Efficiency

The Chinese bond market is the world’s second largest, with government bonds accounting for the majority of the market. The Chinese government has been gradually opening up its bond markets to foreign investors since 2015. However, studies on the Chinese bond markets are very few. Based on data of most frequently traded government bonds in 2015 and 2019, statistical tests including Ken-tau tests and variance ratio tests show that while Chinese government bond markets were generally not efficient in 2015, the efficiency has significantly improved in 2019. The change of market efficiency is likely from the increasing foreign investments, thus a more diverse investor base of the Chinese government bonds. Some structural issues remain such as immature derivative market, low marketization of commercial banks, and restrictions to foreign investors. Finally, this study discusses the implications for investors, policymakers and academics.

Bond Yields Went Down and Foreign Investors Continued to Increase Holdings - Chinese Bond Market Analysis for December 2021

Bond Yields Went Down and Foreign Investors Continued to Increase Holdings - Chinese Bond Market Analysis for December 2021

Rigid payment breaking, default spread and yields of Chinese treasury bonds

While the existence of implicit payment guarantees has long characterized Chinese bond market, recent market oriented reforms in the country have gradually broken this regime. In this context, we examine how the breaking of rigid payment regime influences the yields of Chinese treasury bonds. We argue that the rigid payment breaking affects the yields of treasury bonds by influencing investors’ setup of default risk premiums and the demand for “flight-to-quality” and “flight-to-liquidity”. Our analysis of the daily data of Chinese treasury bond transactions over the period of 2009–2019 support our theoretical arguments, indicating that rigid payment breaking has a negative impact on the yields of Chinese treasury bonds. However, this impact is heterogeneous across the bonds with different maturities and the significant effect exists only for medium and long-term treasury bonds. Our findings advance understanding of how the breaking of rigid payment regime influences the yields of financial products, providing guidelines for how investors should optimize their investment portfolios in the bond market.

The Chinese credit rating industry: Internationalisation, challenges and reforms

Chinese credit rating agencies play a key role in China’s economic reforms and the modernisation of the Chinese bond markets at a time when the Chinese bond market holds the second largest position in the world. This article provides a critical analysis of the internationalisation and challenges of the Chinese credit rating agencies in order to provide an updated understanding of the Chinese credit rating system. It evaluates the legal framework of the Chinese credit rating system and its recent reforms, with a view to providing some critical evaluation of the weaknesses and strengths of China’s approach in dealing with major problems facing the Chinese rating industry. In order to boost the bond market, China embraced a new era of internationalisation, which was set to change the landscape of the Chinese rating industry. China showed new momentum in tightening the discipline of its domestic credit rating agencies and started to allow SOEs to default in more recent times. Moreover, the current legal framework governing the Chinese rating industry provides a robust protection for rating victims, although it lacks strength in dealing with other major defects of the industry, such as conflicts of interest and lack of transparency.

Interaction between Exchange Rates and Foreign Investor Behaviors in the Chinese Bond Market

Interaction between Exchange Rates and Foreign Investor Behaviors in the Chinese Bond Market

Implicit government guarantees and the externality of portfolio diversification: A complex network approach

Policy changes have a significant impact on financial markets. In this study, we build and calibrate a heterogeneous-agent model of a complex network using real data, then empirically examine the effects of policy changes on the risk contagion mechanism in the Chinese bond market. We find that the externality of diversification is positive, that is, a diversified portfolio can reduce the adverse effects of a negative shock, however, the positive externality weakened after the break of implicit government guarantee. Our findings show that policy changes influence the market through price co-movement and diversified portfolios. Moreover, the externality of diversification and the effect of policy changes vary between government and corporate bonds. Finally, investment strategies are proposed based on the findings.

Downside risk and defaultable bond returns

This paper analyzes the influence of downside risk on defaultable bond returns. By introducing a defaultable bond-trading model, we show that the decline in market risk tolerance and information accuracy leads to trading loss under downside conditions. Our empirical analysis indicates that downside risk can explain a large proportion of the variation in yield spreads and contains almost all valid information on liquidity risk. As the credit level decreases, the explanatory power of downside risk increases significantly. We also investigate the predictive power of downside risk in cross-sectional defaultable bond excess returns using a portfolio-level analysis and Fama-MacBeth regressions. We find that downside risk is a strong and robust predictor for future bond returns. In addition, due to the higher proportion of abnormal transactions in the Chinese bond market, downside risk proxy semi-variance can better explain yield spreads and predict portfolio excess returns than the proxy value at risk.

Intra‐industry spill‐over effect of default: Evidence from the Chinese bond market

AbstractWe investigate the intra‐industry spill‐over effect of defaults in the Chinese bond market by using a sample of public corporate debt securities for the period 2014–2018. We find that both industry portfolios and individual firms witness a strong contagion effect, which further spreads to the primary bond market, triggering a surge in the debt financing cost for default industries. Moreover, this contagion effect is stronger for low‐competition industries and regulated industries, as well as when a default happens to state‐owned enterprises. Better information access and higher bond liquidity alleviate the contagion effect, lending support to the information updates and liquidity dry‐up hypotheses.

The Potential of China’s Bond Market

The Chinese bond market is experiencing substantial financial growth. This is evidenced by its opening up to foreign investors who are taking advantage of new investment opportunities in China’s long-term expanding economy. There has been a change in the financial policies of China’s bond market that has permitted more outside funds to come into its market. The influx of investor financial capital into China is a sign of the national government’s drive for economic stimulus. This allows foreign investors to take advantage of the growth of China’s real estate market and the nation’s massive effort to expand and modernize its infrastructure. The Chinese bond market consists mainly of public sector entities rather than private firms. Foreign investors can purchase either bonds issued by state-owned enterprises or by local governments or their financial vehicles. While the Chinese bond market is expanding, there are problems associated with credit ratings that do not correctly reflect data regarding credit quality. This could mean more risk for bond investors than they can tolerate or afford. The Chinese bond market must also compete against bond markets in other parts of the world in regards to returns, interest rates, volatility, safety, liquidity, and marketability. While there is the potential for vast financial opportunities, there is also the possibility of high risk.

Price Discovery in China’s Corporate and Treasury Yield Curves

As financial development progresses, the maturity structure of bond yields plays a rising role not only in the financial system but also as a key transmission channel of monetary policy. China is likely to be no exception. However, specific characteristics in China’s bond markets raise two major questions. First do China’s Treasury bonds offer the benchmark term structure of yields, or is this role fulfilled by the young but fast expanding corporate bond market? In other words, where does price discovery take place in the Chinese bond market in terms of the different components of the yield curve? We identify both dynamic and long-run relationships between each of the level, slope and curvature factors of the Treasury and corporate bond markets yield curve in China. We aim at determining which market plays a leading role in the discovery of each factor of the yield curve. We obtain three main results. First, we document for the first time the presence of a long-run relationship between the corporate and Treasury bond markets in China both for the level and the slope of their yield curve. Second, such a long-run relationship appears to be stable between the slopes over the full sample 2006-2017, but shows a break for the level factor in 2012. Third, the source market for price discovery varies with the parameters of the yield curve. While the corporate bond market is the source of price discovery for the level factor, this function is fulfilled by the government bond market for the slope parameter. The finding that the Treasury bond market is not fully dominant in level bond-pricing may not come as a surprise. Although China’s corporate bond market has developed rapidly in the past fifteen years, there were few default cases during that period. It is believed investors treat the default risk of corporate bonds as similar to that of Treasury bonds, and benefit from the high corporate spread. Our results for the slope parameter imply that market-oriented reform has progressed enough for the Treasury bond market to already provide a benchmark slope for the yield curve of corporate bonds. When the reform progresses further, we would expect corporate bonds to be priced according to their risk profile which should make the Treasury market lead in price discovery also for the level of the yield curve.

Valuation model for Chinese convertible bonds with soft call/put provision under the hybrid willow tree

The Chinese convertible bond market has been developing rapidly in the last 10 years. However, some special characteristics of the Chinese convertible bond, such as the soft call/put provision, cause huge difficulty in the valuation. In this paper, we establish a new valuation model for the Chinese convertible bond, based on the available Chinese market data, through a hybrid willow tree approach with consideration of the underlying stock price, stochastic interest rate, and credit risk of the issuer. We employ the Brownian bridge to handle the special characteristics. Finally, we examine our model prices for the daily market closing prices for 20 Chinese convertible bonds traded from 2007 to 2017. The empirical results show the effectiveness of our valuation model under the historical and implied volatilities of the underlying stock price.

중국경제정책 불확실성의 장기국채 수익률에 대한 영향 분석

The purpose of this study is to analyze how the increase in economic uncertainty affects the flow of funds in the financial market from the perspective of the current time when Chinese economic uncertainty is growing again. More specifically, this study aims to analyze the relationship between treasury bond yield and economic policy uncertainty to assess whether the uncertainty has an impact on the long-term treasury bond through the preference for safe assets. Two possibilities exist. The first is that, with the growth and development of the Chinese financial economy, it has developed substitutability between risky assets represented by stocks, especially long-term treasury stocks and safe assets represented by treasury bonds. The second is that, although China’s bond market is world’s the second or third largest in terms of issued bonds, the transaction volume falls short of this, and participants are limited, resulting in insufficient market supply and transaction with prices not fully reflecting such information. Therefore, this study aims to verify which of these two possibilities is correct through empirical analysis. This study confirms that, although the Chinese bond market is still immature in terms of trading volume and market participation, long-term government bond yields respond due to the preferences for safe assets caused by the increasing economic uncertainty.

Can the Chinese domestic bond and stock markets facilitate a globalising renminbi?

A global renminbi (RMB) needs to be backed by a large, deep and liquid RMB market with a world-class Chinese government bond (CGB) market as its core. It also needs the support from a bigger and more open domestic stock market. China’s CGB market is the sixth largest local currency sovereign bond market in the world. By transforming the non-tradable, captive central bank liabilities into homogeneous and tradable CGBs through cutting the still high Chinese reserve requirements by 1/3, the size of the CGB market can rise by 40%, boosting market liquidity while trimming distortions to the banking system. Also, policy bank bonds may attract foreign investor demand. Finally, a bigger and more open domestic A-share stock market also helps expand the RMB assets in the international investor portfolio. With both bigger bond and stock markets and their higher foreign ownerships following market opening, the combined sum of Chinese domestic bonds and A-shares held by foreign investors may increase five folds during 2018–2025, lifting the RMB asset position in global investor portfolios, facilitating a potential global RMB, while promoting a deeper and more efficient Chinese domestic capital market. This process of liberalising cross-border portfolio capital flows for non-resident investors may bring both risks and benefits to the Chinese economy.

The Analysis of Chinese Convertible Bond Market

Convertible bond is a type of hybrid security with both bond- and stock-like features. The Chinese market of convertible bonds has developed dramatically during the last decade. This paper will conduct a comprehensive analysis of this market. Firstly, a brief introduction of convertible bond and the historical evolution of this market in China is presented, then we analyze various investment risks related to convertible bonds. Next, this paper proposes the basic valuation model for convertible bonds, which is the Black-Scholes model and modifies it by taking the delusion effect of conversion into account, leading to the Gailai-Schneller model. In addition, the differences of the outcomes obtained by these two models are compared and analyzed based on the pricing of Shanghai Electric convertible bond. In the sixth part, this paper mainly explains two types of applications of convertible bonds in portfolio management. In the end, several problems existing in Chinese convertible market as well as some suggestions for solving them are discussed.

Policy Interventions and Liquidity in Segmented Chinese Credit Bond Markets

This paper documents the pricing of liquidity and identifies its drivers in the four main segments of the interbank and exchange credit bond markets in China. First, we find that liquidity effects are priced in credit bond yield spreads, and differ significantly across these four segments. Second, we identify several channels through which liquidity may affect the pricing of credit bonds. We find that the risk-sharing channel and the macroeconomic channel have significantly influenced liquidity effects, while the information channel does not seem to have had any such clear impact. Third, we analyze the impact of two types of policy shocks, including one collateral shock on repo-eligibility in the exchange market and four liberalization shocks on foreign investment in the interbank market, on the levels of liquidity and the pricing of liquidity effects in the Chinese credit bond markets. We identify the most important of the four policy shocks on interbank liberalization to be the policy on the Bond Connect program linking Chinese and overseas markets.