Can The Chinese Bond Market Facilitate A Globalizing Renminbi? Guonan Ma and Wang Yao Iftekhar Hasan

Goal: RMB is a Global Currency How? Consolidate Public Sector Liabilities Externality: Banks get a Lower Required Reserve Ratio Large Government Bond Market – Investor Base, Liquidity, Global Pareticipation. Assumptions and End Results are very Optimistic

Authors are Experts in this field: Ma (2007), Ma and McCauley (2014), Ma and McCauley (2013), Ma and McCauley (2008) – Openness and Capital control Ma, Yan and Liu (2013) – RR Practices Ma, Remolona and Jianxiong (2006) Corporate Bond Markets McCauley and Ma (2015)- Consolidating Public Sector Debts in China. [McCauley (2003), McCauley and Remolona (2000) – Unifying Bond Markets; Size and Liquidity of Government Bond Markets]

The Importance of Bond Market  Why develop bond market? 1.It finances fiscal deficits (Government Bond Markets). 2.It finances large investment projects (scope for risk-sharing; bond contracts are tradable). 3.It makes financial markets more complete by generating market interest rates that reflect the opportunity cost of funds at each maturity.

The Importance of Bond Market 4.Vibrant bond markets create alternative financing channels and reduce firms’ reliance on global equity investment inflows and banks. 5.It helps risk management (mis-match asset and liability, foreign exchange risk). 6.It puts providers and users of capital together and makes the credit evaluation process more transparent. 7. This is true for both fiscal deficit and fiscal surplus countries.

Sample Description  Our estimations are all based on the following groups: Groups in Market No. of Countries in the Group Group1: Only Stock Market 68 Group2: Both Bond and Stock Market 49 Group2A: Strong Stock Market with Weak Bond Market 17 Group2B: Strong Stock Market with Strong Bond Market 17 Group2C: Weak Stock Market with Weak Bond Market 8 Group2D: Weak Stock Market with Strong Bond Market 7 *All Markets have Banks. *Strong market means developed market; Weak market means less developed market.

Part 1: The absence of bond markets: Implication on Stock Market 1.Stock Liquidity 2.Information Content of Stocks

Bond Market and Stock Market Liquidity Group Overall Stock Market Liquidity Group1: Only Stock Market0.242 Group2: Both Bond and Stock Market0.435 Group2-Group10.193*** Group2A: Strong Stock Market with Weak Bond Market Group2B: Strong Stock Market with Strong Bond Market Group2B-Group2A0.04 Group2C: Weak Stock Market with Weak Bond Market Group2D: Weak Stock Market with Strong Bond Market Group2D-Group2C0.131***  We use turnover to measure stock liquidity.  Stock turnover: The number of shares traded divided by the number of outstanding shares.

Stock Return Synchronicity: a case of WACHOVIA

Stock Return Synchronicity: a case of BANK OF CHINA

Target Stock Exchange Information Content Change of Acquiring Stock Exchange Idiosyncratic Risk Change of Acquiring Stock Exchange Equity Volatility Change of Acquiring Stock Exchange Group1: Only Stock Market 0.232**-0.014*-0.089** Group2: Both Bond and Stock Market 0.402***-0.027*-0.109** Group2-Group10.17** * Bond Market and Stock Exchange Consolidation --- Information Content

Bond Market and the Cost of Corporate Borrowing Groups Loan Spread (basis points) Loan Size ($ mil) Loan Maturity (month)Collateral Group1: Only Stock Market Group2: Both Bond and Stock Market Group2-Group1 -27***69***9**-0.1*** Group2A: Strong Stock Market with Weak Bond Market Group2B: Strong Stock Market with Strong Bond Market Group2B-Group2A 11108*** Group2C: Weak Stock Market with Weak Bond Market Group2D: Weak Stock Market with Strong Bond Market Group2D-Group2C -31**36**12*-0.05**

Cost of Corporate Borrowing---Before and After the Establishment of Bond Market Loan Spread (basis points) Loan Size ($ mil) Loan Maturity (month)Collateral One year before bond market established One year after bond market established After-Before-29**68***10**-0.06

Group Foreign Lenders' Portfolio Share in the Country Group (%) Group1: Only Stock Market11.1 Group2: Both Bond and Stock Market23.4 Group2-Group112.3*** Group2A: Strong Stock Market with Weak Bond Market 24.3 Group2B: Strong Stock Market with Strong Bond Market 28.9 Group2B-Group2A4.6** Group2C: Weak Stock Market with Weak Bond Market 14.7 Group2D: Weak Stock Market with Strong Bond Market 19.2 Group2D-Group2C4.5** Finding: Foreign lenders allocate lower fraction of their lending portfolio in the countries with no or weak bond market. Bond Market and Attraction to Foreign Lending

Foreign Lenders' Portfolio Share in the Country Group (%) One year before bond market established15.8 One year after bond market established26.2 After-Before10.4*** Finding: Foreign lenders allocate significantly higher fraction of their lending portfolio in the country after the bond market is established. Attraction to Foreign Lending---Before and After the Establishment of Bond Market

GroupOne Year after Subpreme Crisis Change in Lenders' Portfolio Share in the Country Group (%) Group1: Only Stock Market-3.6** Group2: Both Bond and Stock Market-2.4** Group2-Group11.2** Group2A: Strong Stock Market with Weak Bond Market -0.9 Group2B: Strong Stock Market with Strong Bond Market -0.7 Group2B-Group2A0.2 Group2C: Weak Stock Market with Weak Bond Market -2.83*** Group2D: Weak Stock Market with Strong Bond Market -2.16*** Group2D-Group2C0.67* Bond Market and Lenders’ Response to Financial Crisis

Bond Market and Cost of Going Public Group#IPOs Underpricing (%) Money left on the table($mil) Group1: Only Stock Market Group2: Both Bond and Stock Market Group2-Group121**-17.78***-36.64*** Group2A: Strong Stock Market with Weak Bond Market Group2B: Strong Stock Market with Strong Bond Market Group2B-Group2A42***-5.93**-19.87** Group2C: Weak Stock Market with Weak Bond Market Group2D: Weak Stock Market with Strong Bond Market Group2D-Group2C23**-36.92***-44.69***  First-day return: percentage change from the offer price to the closing price.  Money left on the table: (Closing pricing on the first day of trading- offer price)* # of shares.

Any Other Perspectives?  What is the Gain and Loss with a Faster or Normal Speed of RMB as a Global Currency? Any Time Frame with the Current Course? Real Effects Alternatives?  The paper used at least 10 times about relative ranking, why and how it is important in the economic outcome?  Is the Liability Swap and the Associated mechanism Risk Free? What are the Risks? RRR 18-9? While Sovereign Back up the Development Bank Bonds!

Any Other Perspectives ?  Comparisons with Other Asian or Even Developed Countries may not be effective way to argue all the times if that means to be Critical with giving Credits.  Is the Liability Swap and the Associated mechanism Risk Free? What are the Risks? RRR 18-9? While Sovereign Back up the Development Bank Bonds!

Conclusions  I still give authors BIG CREDIT for being passionate about ways to propose efficient to resolve regulatory fragmentation, i.e., create a larger Government Bond Market (transforming the non-tradable captive Central bank Liability), creating larger investor base, especially foreign investors, boosting liquidity, facilitating a Global RMB.  A Balanced Evaluation would further strengthen the claims.