Debt Instruments and Markets, Lecture notes of Financial Management

Download Debt Instruments and Markets and more Lecture notes Financial Management in PDF only on Docsity! Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     1   Debt Instruments and Markets Professor Jennifer N. Carpenter NYU Stern School of Business GDP of Top Seven Economies, Trillion USD 2007-2019 0 5 10 15 20 25 30 US China Japan Germany India UK France Projected Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     2   Global Economic Overview Country/ Continent 2019 GDP $T GDP Growth Rate Pop. B GDP per Capita $K Pop. per km2 Med. Age US 21 2.8% 0.33 64 36 38 China 14 6.5% 1.40 10 148 37 Japan 5 0.8% 0.13 38 346 49 Germany 4 1.4% 0.08 50 231 48 India 3 7.0% 1.35 2 452 28 UK 3 1.3% 0.07 43 271 41 France 3 1.5% 0.07 43 109 41 Asia 30 4.44 7 144 31 North America 24 0.58 48 20 35 Europe 22 0.74 29 33 42 South America 4 0.42 9 32 31 Africa 2 1.22 2 42 18 The two largest economies and global growth drivers have very different financial systems… Country 2019 GDP $T 2023 GDP $T % of Global Growth US 21 26 16% China 14 21 26% Japan 5 7 6% Germany 4 5 4% India 3 5 7% UK 3 3 2% France 3 3 2% Country   Bank  Assets  $T    Bond  Mkt  $T   Stock  Mkt  $T   Total  $T   US   17   42   31   90   China   39   13   8   60   • The US financial system is dominated by its securities markets. • China’s financial system is dominated by its state-owned banks. Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     5   0   50   100   150   200   250   300   350   400   450   500   Notional Amounts of Derivatives Outstanding $Trillions 2011   2012   2013   2014   2015   2016   2017   Sources: BIS and eurexchange *Some  equity  forwards  and  opSons  data  points  disconSnued  by  BIS  in  2016   The US Mortgage Market and the Broader Fixed Income Markets 30-Year Fixed-Rate Mortgage • Default Risk • Diversifiable risks • Duration • Embedded options • Capital Financial System • FNMA – insures against default, pools risks • Interest Rate Swaps Market • Caps & Swaptions Market • Mortgage/MBS Funds • Money Market Funds Investors Households & Institutional Investors • The massive US fixed-rate mortgage market emerged from regulation dating back to the 1930s Depression-era New Deal. • This market has helped shape the broader markets for fixed income securities, derivatives, and asset management, which intermediaries depend on to manage and allocate interest rate risk. • Understanding the underlying bond math and fixed income option pricing helps clarify how all these markets fit together. Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     6   WMPs 30% China’s Financial System (% of 14T GDP) Financial System Assets/ Issuers Consumers SOEs SMEs Local Gov’ts/ LGFVs Central Gov’t Sell-side/Buy-side Intermediaries Bank Assets 280% Bank Loans 140% Trusts/Shadow Banks 70% Financial System Liabilities/ End Investors Households HNW Individuals Corporate Lenders Markets Stock Market 50% Bond Markets 90% Repo Markets 5% Funds Mutual Funds 16% Pension Funds Hedge Funds (with limited shorting ability) credit cards mortgages Loans/ Credit Lines Indirect credit extension Entrusted Loans 15% P2P 2% Regulators – Government, central bank, bank and markets regulators Internet Finance 6% Deposits 190% Structured Deposits 10% The Big Four Commercial Banks • ICBC – 69% state-owned • CCB – 57% state-owned • ABC – 79% state-owned • BOC – 64% state- owned • Developed 1979-1984, carved out of parts of the PBoC. • Partially privatized after 2005, but still majority state-owned. Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     7   Four Partner “Asset Management Companies”(AMCs) •  Created after 1997 Asian financial crisis to buy banks’ NPLs, strengthen the banking sector, and prepare for China’s 2001 entrance to the WTO. •  Purchased 2.4T RMB of loans in exchange for low-coupon bonds. •  Recovery rate on ultimate sale of loans estimated 24-40%. •  Diversified into other business lines over the last decade. •  Directed to re-focus on NPLs in January 2018. Three Policy Banks •  Long-term financing for infrastructure and other major development projects (petrochemical engineering, car- manufacturing, electronics) •  Agriculture and rural policy related financing •  Financier for exporting and importing companies and creditor for international loans Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     10   China Foreign Exchange Reserves Administered Lending and Deposit Rates in China Lending rate Deposit rate Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     11   China’s Debt-to-GDP Ratio (PBoC) •  Growth of the shadow banking sector: •  Informal interest rate liberalization policy? •  A way for banks to circumvent lending restrictions? •  Driver of new municipal bond markets? 0% 50% 100% 150% 200% 250% 300% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Central Government Debt Corporate Bonds Entrusted Loans, Trust Loans, Banker's Acceptance Bank Loans Bond Market Growth in China 2002-2018 0 10 20 30 40 50 60 70 80 90 Market Value Trillion CNY Other Corporate Bonds Enterprise Bonds Other Financial Bonds Negotiable Certificate of Deposit Other Government Bonds Policy Bank Bonds Municipal Bonds Treasury Bonds Debt  Instruments  and  Markets   Professor  Jennifer  Carpenter   Overview  of  Debt  Markets  in  the  US  and  China     12   China’s Bond Market is Second Largest in the World as of June 2019 $Billions 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 Total debt securities outstanding (billions) Source: BIS as of 2018 Q1 0 10 20 30 40 50 60 70 80 90 100 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Bond Trading Volume by Market in CNY Trillion Inter-bank SHSE SZSE 0 5 10 15 20 25 30 35 40 45 50 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Bonds Outstanding by Market in CNY Trillion Inter-Bank SHSE SZSE Inter-Bank&SHSE&SZSE Inter-Bank&OTC Inter-Bank&SHSE&SZSE&OTC Others Most bonds are listed and traded in the Inter-Bank Market, though some are traded on the stock exchanges or OTC.