Twofish's Blog

June 6, 2007

An idea about Chinese corporate bond markets

Filed under: china, quantitative finance — twofish @ 4:40 am

Just a thought….

Instead of replicating Western markets in which corporations generally issue bonds directly on the market, it would seem to make sense for mainland China to issue corporate-backed securities which are modelled after mortgage backed securities.  The advantage of issuing corporate-backed securities rather than individual corporate bonds is that then you don’t have to issue credit ratings off of individual corporations but rather can do statistical measures off of baskets of corporations.  You also can start creating mid-risk/mid-return securities with minimal changes to the current banking and finance structure.

Just a thought….

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4 Comments »

  1. Dr Wang..Good thinking!
    MBS are backed by Mortgage payments.Now what backs corporate backed securities?.
    Is there anything called corporate backed securities in any market?.Or is it your brainchild?.

    Comment by thinkerQ — July 12, 2007 @ 11:13 pm

  2. No. There is nothing like that that I know of in any market, although if you know of something like that I’d like to hear about it.

    The main reason I made the post was to establish that I thought of it first. I had a very unique chance to talk about it, because I was between jobs when I posted it. The securities industry is very highly regulated (a very good thing), and one has to be careful not to say anything that suggests that you are offering a new security. I could get into a lot of trouble (and I should get into a lot of trouble) if I say “Hey, this security is a good idea” when unknown to me, another part of the company is selling that security or thinking about selling it.

    However, while I was between jobs, and I didn’t have to worry about a compliance officer looking over my shoulder, I took the chance to talk about one of my pet ideas.

    Just in passing. One thing that most people don’t realize is how financial companies in the United States take compliance with securities and banking regulations *VERY* seriously. People hear about the scandals where people try to break or bend the law, but when someone takes the law seriously and tries to follow it to the letter, that doesn’t get out.

    Comment by twofish — July 18, 2007 @ 3:55 pm

  3. I think this is a very risk strategy in such a pre-matured capital market. It is very difficult to assess the
    riskness of the packed bond as the corp. information is not transperant the market.

    Comment by Lynn — September 21, 2007 @ 11:56 am

  4. Yes nice idea – and you might even get a few off the ground – say by creating a vehicle that would buy Chinese corporate loans in order to achieve a AAA rating by overcolateralising. The current debacle in CDOs, however, alas clearly demonstrates why this approach is fraught with difficulties. Effectively you will be removing the market’s mechanism for establishing the spread for an bond issue, and replacing it by a ‘committee’ who will use arbitrary rules for determining what the spread should be (equivalent to the degree of overcollateralisation that would be required)by fiat. I don’t think this works any more!

    Comment by fred gibson — November 13, 2007 @ 12:01 am


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