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- Informal debt markets - friends and family
- List this first because this is in some ways the most important
- (See work of Hernando de Soto)
- Much financing of start up businesses
- Rational response to information asymmetry
- Rational response to moral hazard issues
- linked in with larger social structures
- Government debt securities issued in 1980's.
- active interbank market
- no municipal debt
- credit benchmark for all Chinese debt
- no long term debt (hence no good yield curve)
- Non-government debt markets also started in 1990 - After completion of pricing reform
- Initially, TVE's allowed to issue debt. Bad things happened in 1992. Defaults and overexpansion of money supply.
- Default of ITC's in Asian Crisis
- Because of this, there has been many limits on the growth of the bond markets
- Separation between commerical and investment banking
- Two main markets for debt securities
- Very active interbank market in government securities
- Less liquid market as part of the Shanghai Securities Exchange * About several dozen SOE's and listed companies
- Most debt occurs through bank loans. 90's reforms are that banks are to loan businesses on basis of profit-loss. The capital structure is irrelevant.
- Overhang due to SOE issues. Non-performing loans (see Nicholas Lardy's books on the subject)
- Problem with interest rates. Risk
- Currently only SOE's and listed companies issue debt in the securities market
- No private bond market
- Unclear rules for bond listing
- Capped interest rates
- No (real) credit rating agencies
- No asset backed securities
- Laws on repossession and bankruptcy unclear
- Early credit reporting agencies
- No municipal bond market
- Rural area finances are a mess, but.....
- Fear of lack of financial discipline
- Bond markets are where the lack of institutional infrastructure is apparent. But things are improving.
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