China & World Economy / pp.27-39, Vol.13, No.6, 2005
An Overview of China's Bond Markets
Kangbin Zheng, Min Ji
[Abstract] This paper introduces the current structure and practice of China s bond markets in general and corporate bond market in particular. It analyses the factors behind the slow development of China s bond markets: heavy government intervention, underdevelopment of direct financing, etc. It also puts forward policy options in promoting bonds markets development, including reform of government regulatory framework and improving financial intermediaries and services.
[Key words] bond markets, corporate bonds, interest rate
[JEL code] G10, G18, N25
I. Introduction
China's success in developing a fully functioning capital market depends in large part on whether it succeeds in establishing a thriving market for bonds. The government has, until recently, restricted the types of bonds that can be issued in China. But China has realized that there are powerful financial reasons to promote the expansion and deepening of the Chinese bond market. Among the most important are, first, that bonds would be desirable additions to the portfolios of Chinese insurance companies, banks, pension funds, and the country's social security fund, and second, that bonds are preferred investments for international investors. The bond market is also where China's growing business sector could raise long-term capital for expansion. A fully functioning bond market would also provide liquidity to China's rapidly expanding economy.
Within a 10-year period, the size of the local currency bond market jumped by 6.7 time from US$66.7 billion (9.5 percent of GDP) at the end of 1995 to US$451.1 billion (28.7 percent of GDP) in late 2004.
China already has a fast expanding bond market that serves the needs of the government in two important ways: by financing a growing deficit and by providing long-term financing for much-needed infrastructure projects. The Chinese companies that can get government support to float corporate bonds, such as large SOEs, will probably still prefer Chinese bank loans and stock offerings for some time to come. However, some corporations, such as Sinopec or Baoshan Iron and Steel Co., Ltd., that have a proven ability and willingness to repay and that need loans to expand or develop or to pay back existing bank loans, will issue corporate bonds.
The China bond market has grown rapidly in recent years driven by the government’s expansionary fiscal stance. The size of the bond market was RMB 5.2 trillion at the end of 2004, which is the third largest in Asia behind only Japan and South Korea. Treasury bonds and financial bonds (including central bank paper) account for 97.6 percent of the total bonds outstanding. Despite the growth in size, the government bond market is still in the very early stage of development. In addition, the corporate bond market remains extremely underdeveloped due to a variety of remaining restrictions.
II. Bond Market Structure in China
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III. Corporate Bond Market: Problems and Future Demand Analysis
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IV. Further Development of Bond Market
1. Steadily Promoting the Development of Direct Financing
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2. The Need to Cultivate Institutional Investors and Credit Environment
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3. The Need to Reform the Regulatory Framework
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4. Foster Intermediaries and Improve Financial Services to Promote Healthy Development of t he Corporate Bond Market
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