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China’s Bond Market

China’s bond market has expanded eightfold over the past decade, reaching USD 9.3 trillion at the end of 2016.1 This rapid growth has transformed it into one of the world’s largest bond markets, ranking third after the U.S. and Japan.

Although the vast increase has helped attract investors, the market’s true potential remains untapped due to widespread misconceptions about China’s fixed income sector. The content in this section thus aims to demystify the market and its regulatory regime, offering a summary of the most important considerations for foreigners looking to purchase Chinese debt.

 

Bond Market Structure

China has both onshore and offshore bond markets. Although the onshore market is restricted to domestic investors and foreign investors who can access it through QFII and RQFII programs, it is the larger market. In fact, China’s onshore market is larger, provides far superior liquidity, and more trading projects. Due to this dominance, the onshore market is the primary focus of our discussion. Within the onshore bond market, China maintains two distinct sub-markets:

  1. The Exchange-Traded Bond Market, which is regulated by China’s Securities Regulatory Commission
  2. The Interbank Bond Market, which is regulated by the People’s Bank of China

Of the two submarkets, the Interbank Bond Market is significantly larger and more liquid, accounting for over 90% of total trading volume, 90% of total bonds outstanding and 99% of trading volume at the end of October 2016.2

The below chart summarizes the key differences between the two sub-markets:

 Inter-bank bond marketExchange-traded bond market
Market size
Approximately RMB 60.7 trillion as at 23 March 2017 (Source: Wind)

Approximately RMB 5.2 trillion as at 23 March 2017 (Source: Wind)
Major types of products tradedChina treasury bonds, bonds issued by People’s Bank of China ("PBOC"), policy bank bonds, financial bonds, enterprise bonds, commercial papers, medium term notes, local government bonds and asset-backed securitiesTreasury bonds, local government bonds, enterprise bonds, corporate bonds and convertible bonds
Key market participantsCommercial banks, insurance companies, mutual funds, security companies, foreign investors with Renminbi Qualified Institutional Investor ("RQFII") status Commercial banks, insurance companies, mutual funds, security companies, foreign investors with Qualified Institutional Investor ("QFII") or RQFII status, corporations and individual investors
Trading hours9:00 a.m. to 12:00 p.m. and 1:30 p.m. to 4:30 p.m. (Hong Kong time)9:00 a.m. to 11:00 a.m. and 1:00 p.m. to 3:00 p.m. (Hong Kong time)
Trading and settlement mechanismTrading mechanism: a quote-driven over-the-counter market between institutional investors settlement mechanism: primarily delivery versus payment, on either a T+0 or T+1 settlement cycleTrading is via an electronic automatic matching system where securities are traded on the Shanghai Stock Exchange or Shenzhen Stock Exchange
Settlement mechanism: clearing and settlement are through the China Securities Depository and Clearing Co. on a T+1 settlement cycle
RegulatorPBOCChina Securities Regulatory Commission
Counterparty with whom investors will tradeThe trading counterparty (i.e. the other market participants)CSDCC, which acts as the central counterparty to all securities transactions on the Shanghai and Shenzhen stock exchanges
Central clearingCCDC, Shanghai Clearing House CSDCC
LiquidityTotal trading volume from October 2013 to September 2014 was approximately RMB34 trillion (Source: China Central Depository & Clearing Co.)Total trading volume from October 2013 to September 2014 was approximately RMB0.4 trillion (Source: China Securities Depository and Clearing Co.)
Associated risksInterest rate risk, credit risk, counterparty riskInterest rate risk, credit risk, liquidity risk
Minimum rating requirementsNo requirement. However, market participants typically require a rating of at least BBB given by a local credit rating agency.No requirement. However, if upon listing a corporate bond or enterprise bond does not have a credit rating of at least “AA” given by a local credit rating agency, then such bond can only be traded on the fixed income electronic platform of the relevant exchange, which is open only to institutional investors. Bonds that do not satisfy this minimum requirement cannot be traded via the quote-driven platform, which is open to all investors, including retail investors.
Types of debt instruments commonly seen and the issuersChina treasury bonds: issued by Ministry of Finance
Central Bank Bonds: issued by PBOC
Policy bank bonds: issued by China policy banks (China Development Bank, Agricultural Development Bank of China and Export-Import Bank of China)
Financial bonds: issued by commercial banks and other financial institutions Non-financial credit bonds: issued by state-owned or state-held entities and corporates
Local government bonds: issued by local provinces or cities Foreign bonds: issued by foreign entities
Treasury bonds: issued by Ministry of Finance
Local government bonds: issued by local provinces or cities
Enterprise bonds: issued by government-related, state-owned or state-held entities Corporate bonds: issued by listed companies
Convertible bonds: issued by listed companies

Key Bond Types in the China Interbank Bond Market

The major types of bonds available in the Interbank market can be grouped into 6 broad categories:3

  1. China Treasury Bonds issued by China’s Ministry of Finance
  2. Bonds issued by the People’s Bank of China, China’s Central Bank
  3. Policy bank bonds issued by policy banks, including China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China
  4. Financial bonds, including commercial bank bonds and non-bank financial institution bonds
  5. Corporate bonds (non-financial), including enterprise bonds, commercial paper (“CP”), and medium-term notes (“MTN”)
  6. Other types of bonds:
    • Local government bonds issued by provincial or city governments
    • Government-supporting institutional bonds issued by Central Huijin Investment Limited, China Railway Corporation and Ministry of Railway
    • Foreign bonds issued by foreign entities
    • Asset-backed securities
    • Mortgage-backed securities.

 

 

 

Source:

1. Chinabond, March 2017

2. Chinabond, Shanghai Clearing House, Wind, CEIC as of 31 December 2016

3. China Central Depository & Clearing Co. and Shanghai Clearing House, as of December 2016