The clumsily-named National Financial Working Conference held late January in Beijing was a momentous event for the world of Chinese finance. But you wouldn't have known this from the painfully vague closing statement or the woefully inadequate reporting by the international financial press.
The conference has only been held twice before: in 1997, following the Asian financial crisis; and in 2002, immediately after China's entry into the WTO.
The first meeting saw an historic decision to bail out the bankrupt financial sector and set it on the path towards a truly market-driven industry. At the second, plans were made to let foreign financial institutions buy stakes in the nation's largest state-owned banks before selling shares to the global investment community.
With the end of China's WTO accession period in December and the supposed full opening of the financial sector to foreign competition, the time was ripe for another meeting.
While little of concrete importance appeared to result from it, the decisions made behind closed doors will have resounding implications in China for years to come.
By far the most important decision was the determination to develop the nation's sickly corporate bond market, a decision which warranted all of one sentence in Premier Wen Jiabao's closing address distributed through state media.
At present, China's corporate bond market is miniscule by every standard. Chinese companies (all of them favored state-owned enterprises) issued US$12.9 billion in corporate bonds last year – a paltry sum compared to a stock market worth more than US$1.3 trillion and around US$4.15 trillion deposited in the banking system.
With bonds providing up to 70% of corporate financing needs in the US while 90% of company funding in China still comes from plain vanilla bank loans, the need for bond market resuscitation becomes even more apparent.
The principal reason for the dire state of corporate bonds in China is the fact that the market is regulated by the National Development and Reform Commission (NDRC), the former state planning agency renowned for its cronyism and rent-seeking. It is derided within most other branches of the Chinese bureaucracy.
The NDRC sets quotas for corporate bonds and approves each issue individually, insisting that each one is fully guaranteed by state banks. This means any buyer is actually buying the credit worthiness of the bank guarantor rather than that of the company.
Recognizing the importance of a strong bond market, other regulatory agencies have been battling to seize control. For example, the People's Bank of China – which, along with the Ministry of Finance, oversees the comparatively huge and relatively liquid Treasury bond market – has quietly usurped the NDRC through a clever use of definitions.
In the middle of 2005 it established a "short-term corporate paper" market for companies to issue fixed-income securities of less than one year on the interbank market. In contrast to the NDRC, it set no quotas and established a set of minimum requirements rather than an arbitrary individual approval system.
In 2006, companies issued more than US$38 billion of these bonds.
A battle won?
The China Securities Regulatory Commission (CSRC) is the other force in a three-way war over control of the bond market. Currently limited to convertible bonds and bonds issued by securities brokerages, it appears that its hard lobbying for more control has paid off.
No announcements were made on the bond market after the working conference. But apparently it was decided that, while the NDRC will retain control over infrastructure bonds from state-owned enterprises, the CSRC will approve bonds from firms with shareholding structures, including publicly listed companies.
The CSRC is likely to introduce a set of standards for bond issuers in place of the quota and kowtow system, allowing in the market to boom.
This may be bad news for the banking sector, which will lose some of its captive market for bank loans. But it means lower interest rates for companies on their borrowing, better returns for investors than on bank deposits, and a healthy kick-start for the virtually non-existent credit rating industry.
All in all, not a bad session's work for China's financial planners.