Approval-based regulation Regulations under which entities must seek explicit approval from relevant authorities before issuing bonds. See also registration-based regulation.
Approval-based regulation Regulations under which entities must seek explicit approval from relevant authorities before issuing bonds. See also registration-based regulation.
Asset-backed note A type of asset-backed security issued by nonfinancial companies in the China Interbank Bond Market (CIBM). These securities are regulated by the National Association of Financial Market Institutional Investors (NAFMII). The underlying assets of asset-backed notes are used as collateral and may be securitized.
Bankruptcy remoteness The status of an entity, such as a special purpose vehicle, formed to develop, own, and operate a special project while isolating and minimizing bankruptcy risk. The corresponding entity’s assets and obligations are usually limited to those necessary for development and operation of the designated project. See also special purpose vehicle.
Belt and Road Initiative An initiative proposed by President XI Jinping in 2013. Although the name refers to ancient trade routes, the initiative transcends trade and encompasses five areas to advance the initiative: (1) policy coordination, (2) facilities connectivity, (3) unimpeded trade, (4) financial connectivity, and (5) people-to-people bonds.
Benchmark rate The reference rate set by the People’s Bank of China to guide the bank loan and deposit interest rates of commercial banks. The policy rate is set with the approval of the State Council. After interest rate liberalization, the lower limit on bank lending rates was formally removed in July 2013, and the upper limit on bank deposit rates was eliminated in October 2015.
Block trade Also known as a block order, this is an order or trade submitted for the sale or purchase of a large number of securities. A block trade involves many equities or bonds traded at an arranged price between two parties, sometimes outside the open market, to lessen the effect on the security price.
Bloomberg Barclays Global Aggregate Index A widely tracked global fixed income index that measures the performance of bonds in 24 local currency markets. It is a multicurrency benchmark and includes Treasury, quasi-sovereign, corporate, and securitized fixed-rate bonds. China government and policy bank bonds are included as of April 2019.
Bond Connect A pilot program that connects China’s interbank bond market (CIBM) with the world through a link between the mainland China and Hong Kong SAR market infrastructures. Under Bond Connect, foreign investors do not have to open accounts in mainland China to hold their CIBM bonds. These bonds can instead be held by foreign investors through their global custodian through the Central Moneymarkets Unit. Bond Connect includes two types of trading: northbound gives international investors access to the CIBM and began July 3, 2017. Southbound trading, which will allow mainland investors to trade in major overseas over-the-counter bond markets, will be explored at a later stage.
Bond settlement agent Someone who acts on behalf of a client to settle bond trading according to the instructions of the client.
Capital flow management measures Procedures designed under the IMF’s institutional view on the liberalization and management of capital flows that limit capital flows and encompass measures that discriminate both based on residency and those that do not.
Carry trade A strategy through which an investor borrows money at a low interest rate (typically with a short maturity) to finance the purchase of an asset that is expected to provide a higher return. A popular carry trade strategy in China before 2015 was to borrow in US dollars and lend in renminbi through bond repurchases (repos) or by investing in rates bonds (bonds with no or very low default risk). The return comes from both the positive interest rate spread and renminbi appreciation.
Central Moneymarkets Unit A centralized bond depository facility operated by the Hong Kong Monetary Authority (HKMA). It was launched in 1990 to provide clearing, settlement, and custodian services for Exchange Fund Bills and Notes (Hong Kong dollar debt securities) issued by the HKMA. The unit later expanded to cover bonds issued by the Hong Kong SAR government and debt securities issued by both public and private sector entities. In 1996, the Central Moneymarkets Unit extended its clearing and custodian services to cover debt securities denominated in foreign currencies and established a link with the Hong Kong dollar real time gross settlement system.
Chengtou bond A bond issued by a kind of state-owned enterprise, a local government financing vehicle (LGFV). LGFVs are established by local governments with capital, land, and other public resources. Bonds issued by LGFVs are usually known as urban construction bonds, or chengtou bonds in Chinese. Although there is no particular regulatory definition of chengtou, it is widely used by market participants and is, as such, classified by the China Securities Index and included in Wind databases.
China Central Depository and Clearing (CCDC) A wholly state-owned financial institution approved and funded by the State Council of China. It is an essential national financial market infrastructure that provides central registration, depository, and settlement services. The CCDC is regulated by the People’s Bank of China, Ministry of Finance, and China Bank and Insurance Regulatory Commission. It is one of the three institutions that make up the Central Securities Depository and Securities Settlement System. The other two are the Shanghai Clearing House and the China Securities Depository and Clearing Corporation.
China Foreign Exchange Trade System (CFETS) Also known as the National Interbank Funding Center, an institution directly affiliated with the People’s Bank of China (PBC). It provides a series of services covering issuance, trade, post-trade processing, information, benchmark, and training services for the interbank foreign exchange market, money market, and bond market online and via a dedicated line through advanced electronic information technology. CFETS monitors market transactions daily and provides support and service for the PBC and self-regulated market organizations. CFETS publishes market benchmarks, including the renminbi central parity rate, Shanghai interbank offered rate (SHIBOR), CFETS renminbi index, loan prime rate, renminbi reference rate, bond indices, yield curves, and other information offering reference prices for the market. See http://new.chinamoney.com.cn/english/ausbid/ for additional information.
China government bond (CGB) A Treasury bond issued by the Ministry of Finance.
China interbank bond market (CIBM) Introduced by the People’s Bank of China in 1997 and the largest fixed income market in China, accounting for more than 90 percent of all bond issuance and trading activities. It is an over-the-counter market and operates independently of the Shanghai and Shenzhen exchange bond markets. Many foreign financial institutions are able to invest in China’s domestic interbank bond market.
See also National Association of Financial Market Institutional Investors (NAFMII).
Citigroup World Government Bond Index (WGBI) Now called the FTSE World Government Bond Index. On August 31, 2017, the London Stock Exchange Group (LSEG) acquired The Yield Book and Citi Fixed Income Indices businesses from Citi.
See FTSE World Government Bond Index.
Climate Bonds Initiative An investor-focused, not-for-profit international organization working solely to mobilize the international bond market for climate change solutions by promoting investment in projects and assets necessary for a rapid transition to a low-carbon and climate-resilient economy. See https://www.climatebonds.net/.
Close-out netting A technique used to determine the net obligations of a defaulted counterparty to a derivative or repo transaction. The counterparty’s remaining contractual obligations are terminated, and the final positive and negative replacement values of its positions are combined into a single net payable or receivable. Several countries have carve-outs from their bankruptcy laws to allow for close-out netting. Without them, insolvency administrators could immediately trigger contracts under which the defaulted party is owed money but that would require counterparties with opposite contracts to get in line with other creditors. This could take years to resolve and result in a smaller payout. See https://www.risk.net/definition/close-out-netting/.
CNH forward The deliverable forward exchange rate of the renminbi against the US dollar quoted in the offshore market, mostly in Hong Kong SAR. Like other currency forwards, the term of the liquid CNH forward ranges from overnight to 12 months.
Collateralized loan obligation A form of securitization in which portfolios of loans are securitized and managed as a fund. Each is structured as a series of tranches of interest-paying bonds, along with a small portion of equity.
Collective investment scheme Also known as a collective investment trust, a fund operated by a bank, security house, or trust company that manages a group of pooled trust accounts. These funds group assets from individuals and organizations to develop a larger, diversified portfolio.
Commercial paper A short-term debt instrument issued by nonfinancial firms registered with the National Association of Financial Market Institutional Investors (NAFMII) in accordance with the Guidelines on Interbank Bond Market Non-financial Firms Financial Tools. It is traded on the interbank bond market. Typical maturities are 3, 6, 9, and 12 months.
Corporate bond A type of credit bond issued by nonfinancial firms in China and regulated by the China Securities Regulatory Commission according to the Securities Law and the Guidelines on Corporate Issuance and Trading and traded on the exchange market only.
See also enterprise bonds and medium-term notes.
Covered bond A debt security issued by a financial institution and backed by a separate group of assets; if the financial institution becomes insolvent, the bondholders have recourse to the collateral. Covered bonds provide an efficient, lower-cost way for lenders to expand their business rather than issuing unsecured debt instruments.
Credit asset-backed security A security issued by financial institutions such as banks, automobile financing companies, consumer financing companies, and financial leasing companies in the Chinese interbank market. Usually, the underlying assets are, for example, loans extended by the initiating financial institutions. Their issuance is regulated by the People’s Bank of China. Issuers must register with the China Banking and Insurance Regulatory Commission.
Credit bond A bond issued without collateral by nonfinancial enterprises. In China, credit bonds comprise enterprise bonds, corporate bonds, medium-term notes, and other nonfinancial enterprise debt-financing instruments.
Credit default swap (CDS) A financial swap agreement under which the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. The seller insures the buyer against the default of a particular reference asset. The buyer makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, may expect to receive a payoff if the asset defaults. In China, credit default swaps were launched in October 2016. Default events can be either security defaults or issuer defaults. See https://en.wikipedia.org/wiki/Credit_default_swap for additional information.
Credit-linked note A note that can be regarded as a credit default swap with cash collateral. The credit risk bearer first sets up a special purpose vehicle (SPV), and the two parties enter a credit-default-swap-style contract. The SPV then issues credit-linked notes to other investors. Investors purchase the credit-linked notes by paying the face-value principal and receive interest payments. When certain credit default events take place before credit-linked notes mature, the SPV pays the credit risk bearer according to a credit-default-swap-style contract and then pays back the credit-linked note principal with residual net value. Otherwise, the full amount of principal is repaid. In China, credit-linked notes were launched in October 2016. A default event can be either a bond default or a default by the issuer, or both.
Credit risk mitigation agreement A credit-default-swap-style contract in which one party pays a fee in exchange for another party paying a certain amount of money when a specified credit default event takes place. In China, the agreements were launched in October 2010. Before October 2016, a credit-risk-mitigation agreement could cover only default events of bonds, not issuers.
Credit risk mitigation warrant A credit-default-swap-style security in which the issuer pays a fee in return for investors’ payment when certain credit default events take place. In China, the warrants were launched in October 2010. Before October 2016, a credit-risk-mitigation warrant could cover only default events of bonds, not issuers.
Cross-currency swap Over-the-counter derivatives in the form of an agreement between two parties to exchange interest payments and principal denominated in two different currencies.
Debt-equity swap A transaction in which the obligations or debts of a company or individual are exchanged for equity. In China, this often involves creditors (banks) converting nonperforming corporate loans into equity holdings.
Debt financing instrument of nonfinancial enterprise A marketable security issued by an incorporated nonfinancial enterprise, traded on the interbank bond market, registered with the National Association of Financial Market Institutional Investors under the People’s Bank of China. These instruments conform to the Guidelines on Interbank Bond Market Non-financial Firms Financial Tools, including commercial paper, medium-term notes, private placement notes, and so on.
Delivery versus payment settlement A settlement procedure in securities trading. It stipulates that payments must be made before or at the same time as delivery of securities. The delivery versus payment procedure aims to eliminate counterparty risk.
Dim sum bond A renminbi bond issued outside mainland China. The term comes from “dim sum,” a popular style of cuisine in Hong Kong SAR. The first dim sum bond was issued by the China Development Bank in July 2007, with face value of RMB 5 billion and a term of two years. In 2010, McDonald’s was the first foreign company to issue a dim sum bond, with a face value of RMB 200 million and a three-year maturity.
Double-taxation treaty Usually refers to agreements (typically between two countries) for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital.
DR007 A weighted seven-day interbank pledged repo rate covering deposit institutions. Although the People’s Bank of China has not confirmed DR007 as the policy interest rate yet, it is closely watched by the market to determine interbank liquidity.
Enterprise asset-backed security Issued by nonfinancial firms or financial institutions on the exchange market in Shenzhen or Shanghai and regulated by the China Securities Regulatory Commission. Only qualified investors may invest in enterprise asset-backed securities.
Enterprise bond A type of credit bond issued by nonfinancial firms in China. They are regulated by the National Development and Reform Commission and traded on both the China interbank and the exchange bond markets. The market is almost exclusively for state-owned enterprises. See also corporate bond and medium-term notes.
Entrusted investment fund An investment fund outsourced by some small banks that lack expertise. These banks outsource their investment fund to a mutual fund or security house for management under their investment guidance.
Exchange bond market A market in which individual and small and medium-size institutional investors carry out trading through a concentrated matchmaking method on the exchanges. The exchange market in China includes the Shanghai Stock Exchange and the Shenzhen Stock Exchange.
Exchange-for-physical (EFP) A transaction between two parties in which a futures contract on a commodity is exchanged for the actual physical good. This transaction involves a privately negotiated exchange of a futures position for a corresponding position in the underlying physical good.
Exchange-for-swap (EFS) A transaction negotiated privately in which a futures contract for a physical item is exchanged for a cash-settled swap contract. It is similar to an exchange-for-physical, except that it involves a cash contract rather than a physical goods contract.
Exchange-traded fund (ETF) A marketable security that tracks a stock, commodity, or bond index or other baskets of assets.
Federal and unitary countries A federal system—as in Canada, Germany, and the United States—that shares power between the federal government and the states or provinces. It refers to a political entity characterized by a union of partially self-governing provinces, states, or other regions under a central federal government (federalism). A unitary system of government (or unitary state) is a sovereign state governed as a single entity. The central government delegates different degrees of power to the administrative divisions. Examples include China, Japan, Korea, Sweden, and the United Kingdom.
Financial bond A bond issued by a financial institution. These can be policy bank bonds and commercial financial bonds. Financial bonds are issued both on the China interbank market and on the exchange markets and are regulated by the People’s Bank of China, China Banking and Insurance Regulatory Commission, and China Securities Regulatory Commission.
Financial cycle The cyclical rise and fall of key factors influencing financial markets, such as asset prices and volatility; leverage, credit availability; and investors’ risk appetite, expectations, and confidence. Compared with business cycles, financial cycles tend to be longer (5–20 years), with a median length of about 15 years. They tend to be longer in liberalized, developed markets than in emerging markets.
Foreign exchange and interest rate derivative A kind of security whose price or income depends on the underlying price of certain exchange rates or interest rates. Common foreign exchange and interest rate derivatives include forwards, futures, options, and swaps.
Forward rate agreement An over-the-counter contract between parties that determine the rate of interest or the currency exchange rate to be paid or received on an obligation beginning at a future start date. The forward rate agreement determines the rates to be used, along with the termination date and notional value.
FTSE World Government Bond Index (WGBI) A widely followed fixed income index that measures the performance of local-currency-denominated, fixed-rate, and investment-grade-rated sovereign bonds in more than 20 countries. See also Citigroup World Government Bond Index (WGBI). See https://www.yieldbook.com/m/indices/single.shtml?ticker=WGBI for additional information.
GARCH and EGARCH A generalized autoregressive conditional heteroskedasticity model that is a statistical model for time series data and describes the variance of the current error term as an autoregressive moving average model of the previous time periods’ error terms. EGARCH refers to an exponential generalized autoregressive conditional heteroskedasticity model. The GARCH model imposes nonnegativity constraints on the parameters of the error term function, but there is no such restriction on the EGARCH model proposed by Daniel B. Nelson, in which the conditional variance is an asymmetric function of lagged error terms.
Global custodian bank A bank that provide custodial services in various countries to support holding and trading of securities by clients. Custodians are specialized financial institutions that safeguard the assets of clients, arrange or facilitate settlements, and collect information on incomes.
Government guided fund A fund supplied by a mixture of budgetary (junior tranche) and nonbudgetary (debt-like senior tranche delivering a steady return) contributions typically by state-owned enterprises, local government financing vehicles, banks, and other financial institutions.
Granger causality A statistical technique to determine whether a time series can be statistically predicted by previous observations of another time series. See https://en.wikipedia.org/wiki/Granger_causality for additional information.
Green bond A bond issued to finance projects with potential environmental protection and climate change mitigation benefits. Because there is no unified definition of green bonds across countries, a third party usually verifies whether a bond qualifies as a green bond. For example, nuclear energy is not considered green in some eastern European countries, but most economies agree that solar and wind energy are green.
Green covered bond A bond with a dual recourse structure that is issued by a bank. If the issuing bank defaults, investors are covered by a dedicated pool of assets, such as renewable energy power plants.
Huber-White sandwich estimator An estimation technique that allows heteroskedastic residuals. Basic regression and time series models assume that the error term has the same variance across all observations. When this assumption does not hold, the errors are said to be heteroskedastic, and the estimates are inconsistent and biased in nonlinear models. Huber-White sandwich estimators are used to allow the fitting of a model that does contain heteroskedastic residuals.
Inflation targeting A monetary policy regime in which a central bank has an explicit target inflation rate for the medium term and announces this target to the public.
Insurance asset-backed plan A plan issued by financial companies and regulated by the China Banking and Insurance Regulatory Commission. Only qualified investors may invest.
Interest rate swap (IRS) A kind of financial derivative that involves two parties exchanging the interest payments of two assets, usually of equal amount.
Intergovernmental relations An interacting network of institutions at the national and subnational (provincial and local) levels, set up and refined to enable the various parts of government to cohere in a manner appropriate to institutional arrangements. Intergovernmental relations comprise the processes and institutions through which governments within a political system interact. Analysis of these relations has traditionally focused on formal structure and institutions, in particular those linked with the financial arrangements among government levels.
International Capital Market Association (ICMA) A membership association headquartered in Switzerland, committed to serving the needs of its wide-ranging members, including private and public sector issuers, financial intermediaries, asset managers and other investors, capital market infrastructure providers, central banks, law firms, and others worldwide. It focuses on a comprehensive range of regulatory and market practice issues that affect all aspects of international market functioning. ICMA prioritizes four core areas: primary markets, secondary markets, repo and collateral markets, and green and social bond markets. See https://www.icmagroup.org/About-ICMA/ for additional information.
International Development Finance Club A membership association of development banks. It aims to promote more efficient global development. It was founded in 2011 and had 23 members as of July 2018. See https://www.idfc.org/ for additional information.
International Swaps and Derivatives Association An international organization ensuring the enforceability of netting and collateral provisions in derivatives trading. It has more than 900 member institutions from 70 countries, comprising a broad range of derivatives market participants. See https://www.isda.org/about-isda/ for additional information.
Investment vehicle A nonbank financial entity typically controlled by a third-party financial institution, typically a bank or trust company. In China, these vehicles are largely funded through the issuance of investment products, typically sold as high-yielding alternatives to bank deposits (for example, bank wealth management products) or customized packages of riskier loans (to other banks and institutional investors). They invest in various assets, such as bonds, bank deposits, and nonstandard credit assets, as well as in other investment products. These vehicles rely on short-term financing to use leverage and manage their maturity mismatches, and often benefit from implicit guarantees from their sponsoring financial institution.
See Chapter 1 of the IMF’s April 2018 Global Financial Stability Report for more information.
ISDA Master Agreement A document agreed to internationally and published by the International Swaps and Derivatives Association, which is used to provide certain legal and credit protections for parties that enter into over-the-counter derivatives transactions.
JPMorgan Government Bond Index–Emerging Markets (GBI-EM) A group of indices covering local currency bonds issued by governments of emerging markets. It is provided by JPMorgan Chase.
Local government debt bond-swap program A three-year program the central government rolled out in 2015 to replace debt deemed to be the obligation of local governments—in the form of bank loans, local government financing vehicle (LGFV) bonds, trusts, and other nonstandard borrowing—with local government bonds. The RMB 18 trillion program was completed in 2018. It allowed local governments to restructure off-budget LGFV debt at lower interest rates and with longer maturities, on average.
Local government financing vehicle (LGFV) An economic entity (usually a corporation) with independent legal status set up by local governments to finance investment and urban development projects (chengtou). Local governments usually inject capital, land, or equities into LGFVs as initial capital. LGFVs then raise funding in the market or borrow from banks, often with implicit guarantees of the local governments.
London interbank offered rate (LIBOR) A benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. LIBOR is an average value of the interest rate, which is calculated from estimates submitted by the leading global banks on a daily basis.
M2 A monetary aggregate including currency in circulation, demand deposits, time deposits, savings deposits, and other deposits. Until 2018, China had a quantitative annual M2 target/forecast.
Medium-term lending facility (MLF) A monetary policy tool used by the People’s Bank of China to provide medium-term liquidity to policy banks, development financial institutions, and commercial banks. It requires pledged government securities, highly rated bonds, or high-quality loans with three-month, six-month, or one-year maturities. It was introduced in September 2014.
Medium-term note A type of bond issued by nonfinancial firms, registered with the National Association of Financial Market Institutional Investors (NAFMII) in accordance with the Guidelines on Interbank Bond Market Non-financial Firms Financial Tools. These notes are traded on the Chinese interbank market. Typical maturities are three and five years. See also enterprise bonds and corporate bonds.
Multitier and single-tier custodian system A system under which custodians are divided into different tiers and ultimately centralized at one central depository (multitier). Custodians in each tier provide services that fit their own customer bases. Under a single-tier system, all investors must open accounts under their own names in the national clearing and settlement depository. Although the operational risk in a single-tier custodian system is low, the total cost of large quantities of settlements is rather high.
Mutual fund A professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional.
National Association of Financial Market Institutional Investors (NAFMII) An association that aims to propel the development of the over-the-counter financial market, which is composed of the interbank bond, interbank lending, foreign exchange, commercial paper, and gold markets. It was founded September 3, 2007, with the approval of the State Council of China. It is a self-regulatory organization whose members includes policy banks, commercial banks, credit cooperative banks, insurance companies, securities houses, fund management companies, trust and investment companies, finance companies affiliated with corporations, credit rating agencies, accounting firms, and companies in the nonfinancial sector. See also China interbank market (CIBM).
NAFMII Master Agreement A document published by the National Association of Financial Market Institutional Investors that provides a uniform documentation approach for participants in the China interbank market involved in financial derivatives transactions.
Nominal effective exchange rate (NEER) A measure of the exchange value of a currency against a basket of foreign currencies, usually expressed as an index using values of bilateral trade in assigning the weights to foreign currencies.
Open interest Used in derivatives markets to refer to the number of outstanding derivatives contracts that have not been settled (also referred to as open commitments/contracts).
Open market operation (OMO) Trading conducted by a central bank with banks and other qualified institutions in its local currency to achieve goals such as keeping short-term interbank interest rates within a certain range through adjustment of liquidity in the banking system. An open market operation is a common tool used by central banks to influence liquidity in the financial system. In China, the People’s Bank of China conducts open market operations, mainly through repurchase agreement (repo), reverse repo, and short-term liquidity operations.
Panda bond A bond denominated in renminbi by a non-Chinese issuer and issued in China’s domestic bond market. The first panda bonds were issued in 2005 in the Chinese interbank bond market by two multilateral institutions, the Asian Development Bank and the International Finance Corporation.
Pledged supplementary lending (PSL) A lending facility through which the People’s Bank of China provides long-term, stable, and properly priced loans for development, such as shantytown redevelopment projects and improved rural infrastructure. It also provides liquidity support for policy banks to extend credit to strategically important areas such as agriculture, water conservation, and green energy. These loans require highly rated bonds or high-quality loans as collateral.
Policy bank bond A bond issued by the China Development Bank, Export-Import Bank, or China Agricultural Development Bank.
Policy bank A state-owned financial institution in China responsible for implementing government economic policies. These comprise the China Development Bank, Export-Import Bank, and China Agricultural Development Bank. In 2015, the China Development Bank was designated by the State Council as a development finance institution, but it is still considered a policy bank by market participants.
Private placement note A type of credit bond issued by nonfinancial firms to selected qualified investors, registered with the National Association of Financial Market Institutional Investors (NAFMII) in accordance with the Guidelines on Interbank Bond Market Non-financial Firms Financial Tools, and traded on the interbank bond market.
Qualified Foreign Institutional Investor (QFII) A program that allows foreign institutional investors to use foreign currency funds to invest in China’s domestic capital market. The QFII program was introduced in 2002 by the China Securities Regulatory Commission. Foreign investment in China is subject to a quota system governed by the China State Administration of Foreign Exchange.
Real estate investment trust (REIT) A company that owns, operates, or finances income-producing real estate. REITs give each investor either a percentage interest in a property or an interest in a loan secured by a mortgage or deed of trust on a property. REITs often trade on major exchanges in the same way as other securities and give investors a liquid stake in an array of real estate assets.
Registration-based regulation Regulation under which an economic entity must register with relevant authorities only information related to the business it hopes to conduct without seeking approval. If a certain bond issuance is regulated on a registration basis, firms need submit only the relevant information to the regulating agencies before issuing the bonds. They do not have to wait for approval documents. See also approval-based regulation.
Repo A repurchase agreement that is a form of collateralized borrowing in which the borrowing party sells a security and enters into a forward purchase agreement to repurchase the security at a later date. The interest rate is often determined by the relative price of the security in the first and second transactions.
Reserve requirement The minimum amount of reserves commercial banks must hold, usually in the form of a percentage of deposits.
RMB Qualified Foreign Institutional Investor (RQFII) A program that allows foreign investors to use renminbi-denominated funds raised outside mainland China to invest in China’s domestic capital markets. The RQFII program was initiated in late 2011. RQFII investment licenses are approved by the China Securities Regulatory Commission, and the investment quota is determined by the State Administration of Foreign Exchange.
Shanghai Clearing House (SHCH) A qualified central counterparty accepted by the People’s Bank of China and one of the central securities depositories in China. Established November 28, 2009, the SHCH is an important financial market infrastructure in China.
Shanghai interbank offered rate (SHIBOR) A daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the Shanghai interbank money market. See also London interbank offered rate (LIBOR).
Short-term liquidity operation (SLO) An open market operation tool of the People’s Bank of China to manage the money supply. Short-term liquidity operations are conducted mainly through repurchase agreements (or reverse repurchase agreements) with large banks in China.
Special construction funds Public investment funds entirely funded by policy banks.
Special drawing right (SDR) An international reserve asset introduced by the IMF in 1969 to supplement its member countries’ official reserves. To date, SDR 204.2 billion (equivalent to about US$291 billion) has been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
Special purpose vehicle (SPV) A bankruptcy-remote entity that a parent company uses to isolate or securitize assets. It often holds these assets off its balance sheet. An SPV makes a subsidiary company’s obligations secure even if its parent company goes bankrupt. Sometimes an SPV is designed to serve as a counterparty for swaps and other credit-sensitive derivative instruments. See also Bankruptcy remoteness.
Standard lending facility A liquidity supply channel of the People’s Bank of China to meet temporary liquidity demands of commercial banks and rural cooperative financial institutions. It is considered the upper bound of the interest corridor. It was introduced in early 2013. The maturities are overnight, seven days, and one month.
State Administration of Foreign Exchange (SAFE) A deputy-ministerial-level state administration responsible for foreign exchange administration in China, supervised by the People’s Bank of China. SAFE headquarters are in Beijing, with branches and subbranches across the country.
Targeted medium-term lending facility (TMLF) A lending facility introduced December 2018 by the People’s Bank of China as a monetary policy tool to provide long-term stable funding for financial institutions to expand their credit support to small and micro and private enterprises.
Total return swap A transaction that usually involves two parties. One party pays according to a predetermined funding rate, which can be either fixed or variable. The other party pays the total return of the underlying asset, including both interest and capital gains.
VIX An index computed by the Chicago Board Options Exchange. It measures market expectations of future stock market volatility based on option prices of the S&P 500 index. It is considered a gauge of risk-on or risk-off sentiment in the financial market. See http://www.cboe.com/vix for additional information.
Window guidance An informal way for monetary and regulatory authorities to influence the behavior of banks and other financial institutions.
Yield curve Shows the relationship between interest rates and maturity. It usually puts maturity on the horizontal axis and the corresponding interest rates on the vertical axis. A shift or change in the shape of the yield curve over time can provide information on market expectations of the future movement of interest rates.