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Part 3 Financial Market Analysis
In the first half of 2010, performance of China’s financial market continued to be sound and in general market liquidity was adequate. The money market traded briskly and interest rates fluctuated upward. Indices on the bond market went up slightly and bond issuances grew significantly. Stock indices fluctuated downward whereas financing on the stock markets rose substantially. In the first half of 2010, aggregate financing by the domestic non-financial sector (including the household, corporate, and public sectors) stood at 6.0 trillion yuan, down 32.3 percent year on year. Loans dominated the financing structure but their share of total financing declined compared with their share in the previous year. The share of financing through stocks rose notably, and enterprise bond financing continued to increase by a large amount. Therefore, direct financing played a more important role.
I. Financial market analysis
1. The money market traded briskly and interest rates fluctuated upward
In the first half of 2010, repo transactions on the money market increased steadily and inter-bank borrowing rose remarkably. The turnover of bond repos totaled 38.4 trillion yuan, with an average daily turnover of 314.6 billion yuan, up 7.7 percent year on year. The turnover of inter-bank borrowing reached 11.1 trillion yuan, with an average daily turnover of 91.4 billion yuan, an increase of 40.6 percent year on year. Overnight products dominated bond repo and inter-bank borrowing transactions, accounting for 79.3 percent and 87.7 percent in their respective turnovers. The total turnover of government securities repos on the stock exchanges soared 100.2 percent to 2.6 trillion yuan. The financing structure on the money market showed the following characteristics. First, the structure of the funding supply changed. As the commercial banks strengthened their balance-sheet management in response to the changing economic and financial situations, the policies for macro-economic management, and regulatory requirements, net lending of state-owned commercial banks declined substantially whereas other commercial banks became net borrowers in the first half of 2010, after being net lenders in the same period of the last year. Net lending of the state-owned commercial banks registered 10 trillion yuan, down 6.4 trillion yuan year on year. Net borrowing of other commercial banks registered 4.1 trillion yuan, 4.3 trillion yuan more than during the same period of the last year. Second, non-banking financial institutions in general showed a lower demand for funds. Facing the many uncertainties with respect to domestic and international economic prospects and the heightened fluctuations on the domestic stock market, they traded more cautiously and their funding demand declined substantially from the previous year. Net borrowing by securities and fund management companies saw a year-on-year decline of 29.9 percent and 95.8 percent respectively in the first half of 2010. In addition, with their own funding sources and balance sheets improved, net borrowing of foreign financial institutions posted a year-on-year decline of 32.6 percent. Interest on the money market fluctuated upward. In the first four months of 2010 to April, due to the diminishing impacts of the Spring Festival, the weighted average interest rate of bond-pledged repo and inter-bank borrowing declined steadily after hitting a high of 1.55 percent and 1.52 percent respectively in February. Since mid-May, affected by various factors, such as the increased risk aversion caused by the European sovereign debt crisis, the impending review by the regulatory authority of the deposit-to-lending ratio and other indicators, and additional capital raising by large commercial banks, market liquidity fluctuated and interest rates on the money market moved upward. In June, the monthly weighted average interest rate of bond-pledged repo and inter-bank borrowing was 2.38 percent and 2.31 percent respectively, up 67 and 64 basis points from May, and up 112 and 106 basis points from the same period of the last year. At end-June, the overnight and 7-day Shibor stood at 2.27 percent and 2.62 percent respectively, an increase of 112 and 105 basis points over end-2009. The 3-month and 1-year Shibor registered 2.63 percent and 2.62 percent, up 80 and 37 basis points respectively from the beginning of the year. Trading in interest rate swaps grew rapidly whereas the forward interest rate market traded sluggishly. In the first half of 2010, a total of 4,262 transactions in RMB interest rate swaps was conducted, with an aggregate nominal principal of 485.63 billion yuan, up 160 percent year on year. In particular, trading of interest rate swaps with a maturity of less than 1 year was the most buoyant, with an aggregate nominal principal of 256.76 billion yuan, accounting for 52.9 percent of the total turnover.
There were 644 bond forward transactions with a total turnover of 235.55 billion yuan, down 17.6 percent year on year. In particular, bond forward products with a maturity of less than fourteen days accounted for 90 percent of the total turnover. Interest rate forward products traded sluggishly, and there was only one transaction conducted in May and June respectively, with a total nominal principal of 500 million yuan. The Shibor played a more important role in pricing interest rate derivatives and the turnover of the Shibor-based interest rate swaps posted 140.1 billion yuan in the first half of 2010, accounting for 29 percent of the total turnover of the interest rate swaps. All the interest rate forward agreements were based on the
Shibor.
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