December 8, 2016 / 2:37 AM / a year ago

China launches exchange for fast growing commercial paper market

SHANGHAI, Dec 8 (Reuters) - China launched a platform for centralized commercial paper trading on Thursday to promote and better regulate a 100 trillion yuan ($14.54 trillion) market that is being increasingly tapped by small businesses to meet short-term financing needs.

The Shanghai Commercial Paper Exchange Corp Ltd, overseen by China’s central bank, is the government’s latest effort to improve its financial infrastructure, and will help consolidate a fragmented market that has seen a series of scandals in recent years.

“China’s CP market has been growing rapidly, and is playing a positive role in corporate financing and forming a multi-layer financial system,” Zhou Xiaochuan, governor of the People’s Bank of China (PBOC), said in a congratulatory note, which was read out at the launch event.

He said the exchange “will boost transparency and efficiency of the market...and help ward off risks. It will also improve the mechanism of macro-management, and improve the channel for monetary policy transmission.”

China’s commercial paper market has expanded quickly in recently years as the financial instrument, widely used in business transactions, has become an important short-term financing tool for small firms as they struggle in a slowing economy.

In 2015, commercial paper trading volume in China’s financial system jumped 68 percent to 102.1 trillion yuan, according to central bank data. Small- and medium-sized companies accounted for two-thirds of banks’ acceptance bills issued that year.

But the fragmented market suffered from inefficiency, and threatened to become a hotbed for fraud. There have been several high-profile bill-financing scandals over the past year that ensnared lenders such as Agricultural Bank of China and China CITIC Bank.

The launch of the new exchange may also aid in China’s efforts on interest rate liberalization, by helping to lower borrowing costs for companies and improving the credit system, Zhao Cila, an official at CITIC Bank’s Shanghai branch, wrote in an analysis ahead of the launch.

The exchange provides an electronic trading platform for instruments including banks’ acceptance bills and commercial acceptance bills.

The launch came a day after the central bank published rules on commercial paper trading. It said the rules were aimed at “regulating trading behaviors, warding off risks, protecting the interest of trading parties, and promoting healthy development of the CP market.” ($1 = 6.8780 Chinese yuan) (Reporting by Samuel Shen and John Ruwitch; Editing by Kim Coghill)

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