1. Class C Accounts
Settlement members of the interbank bond market are divided into Class A members, Class B members, and Class C members. Class A accounts are mainly commercial banks; Class B accounts are rural credit institutions, securities firms, funds, and insurers; Class C accounts are mainly non-financial institutional legal entities, whose trading settlement must be entrusted to a Class A member to handle on their behalf. The threshold for opening a Class C account is low, and it lacks substantive regulation.
2. The Interbank Bond Market
The interbank bond market is not just a market between banks. It is an inter-institutional market that includes banks of all kinds, rural credit institutions, insurers, securities firms, funds, and other financial institutions, as well as non-financial corporate legal entities. The interbank bond market is an over-the-counter (OTC) market.
3. How the Interbank Bond Market Trades
Investors negotiate by price inquiry with a chosen counterparty and conclude each trade individually. It is characterized by decentralization, negotiated agreement, and directness, which is utterly different from the centralized computer matching of the Shanghai and Shenzhen exchanges. In 2011, total interbank bond turnover approached 200 trillion yuan.
4. Proxy Holding
Proxy holding is not in itself illegal. The motive may be to shift profits, to hide losses, or to sidestep point-in-time assessments as a temporary workaround. If the returns from proxy holding go to the institution, it is a way of earning investment income while circumventing regulation, and at most counts as non-compliance; but if those returns end up in an individual’s pocket, it becomes illegal transfer of benefits.
5. Rolling Proxy Holding
After an investment institution sells a bond as a cash bond, it privately signs an agreement with the counterparty to buy the same bond back at some future point at close to the original cost price. Dividing by the term of the repurchase, a shorter term is called proxy holding; continuous rolling operations whose terms last months or even years are called rolling proxy holding.
6. The Primary-Half Market
Because a bond takes some time to go from issuance to listing, selling the subscribed bonds for arbitrage during this window is the primary-half market. The vast majority of bonds are issued through book building, and the pricing process is opaque, which creates the conditions for rent-seeking by Class C accounts of every kind.
