Steering Group Formed to Create PBOC-led National Bills Exchange

The People’s Bank of China (PBOC) has recently formed a steering group for the creation of a central exchange for commercial paper. The group, comprising officials from product innovation department of bills operations centre in major state-owned banks and some joint stock commercial banks, will discuss specific proposals for the project.

It is learnt that some commercial banks have come up with proposals to establish the exchange under the stockholding system, lead-managed by PBOC with shares distributed among several large commercial banks.

The electronic trading platform launched by the Industrial and Commercial Bank of China (ICBC)’s Bills Discounting Department in March last year can help market participants to break through geographical restrictions in transactions, featuring transparency in transaction information, free quotes, transaction inquiry, clearing and settlement, statistical analysis and transaction management.

However, whether the exchange would ultimately model on the ICBC’s electronic transactions mode is not yet conclusive.

The National Electronic Commercial Drafts System (ECDS) lead-managed by PBOC has been established for many years. With trading mainly in electronic commercial papers, ECDS receives, registers and forwards commercial draft information messages, provides services in commercial draft currency payments and fund settlement-related services and an integrated business processing platform for registration, inquiry of commercial drafts in paper form and open quote service of commercial drafts (both in paper form and electronic form).

Currently, ECDS is not commonly used because only bills in paper form have room for gray area income and it illustrates the scale of manoeuvre in credit by commercial banks. The room for manoeuvre is less for electronic bills which have relatively high transparency.

Earlier reports indicated that the central commercial drafts exchange planned by PBOC is a secondary market.

If the acceptance draft in paper form issued by banks is taken as issuance in primary market, then a secondary market will be created in the circulation and transaction process by bill intermediaries.

Since the first quarter of this year, the risk incidents in bank bills of the Agricultural Bank of China, the CITIC Bank and the Bank of Tianjin have involved a total of Rmb5.67 billion, raising concern for bill issue security. As a response in regulation, the China Banking Regulatory Commission (CBRC) issued its Circular on the Risk of Bills Business at the beginning of the year warning against bills risk, followed by the Circular on the Strengthening of Bills Business Regulation to Promote the Healthy Development of the Bills Market (Yin Fa No. 126 [2016]) jointly issued by CBRC and PBOC. According to the circular, banks are required to carry out a system-wide bills business risk investigation and take immediate and effective measures to plug the loopholes for existing risks before 30 June, 2016. Meanwhile, reports on the self-examination of risk are required to be submitted to PBOC and CBRC before 15 July.

Currently, the inter-bank bill rediscount market is fraught with irregular transactions, including commercial banks acting as "bridging banks" to earn interest spreads, reducing the size of credit by buying and reselling bills, or selling and repurchase, as well as bills intermediaries making profits by maturity mismatch. Some serious offences even include small rural banks at the support of bills intermediaries act as agents to transfer money out of the inter-bank money market.

With the creation of the central exchange in the future, the chaos may be rectified effectively.

For details of the Circular (Yin Fa No. 126 [2016]) in Chinese, please see: http://n2.sinaimg.cn/finance/e992d4d1/20160506/2016050615544350289.pdf