Over the past twenty years, especially the past decade, China has taken enormous strides to develop its bond market as an integral step of financial reform, along with its tremendous effort in interest rate liberalization and internalization of its currency RMB.
Figure 1 Panel A depicts the growth of Chinese bond market capitalization scaled by GDP in the past decade; we observe that bond market capitalization over GDP rises from 35% in 2008 to more than 90% in 2017. For comparison, the bond market capitalization over GDP in U.S. stays slightly above 200% during the same time period. Relative to the stock market capitalization, Chinese bond market has been also experiencing a steady uprising trend, only to catch up to the U.S. level which is about 130% in 2017. Due to historical reasons, there are two distinct and largely segmented markets in today’s Chinese bond markets: Over-the-Counter based interbank market, and centralized exchange market. The interbank bond market in China resembles the interbank market observed in developed countries like U.S., while the exchange bond market in China is part of the Stock Exchanges in Shanghai and Shenzhen. Section 4.2 offers a brief history of the development and evolution of these two bond markets. The interbank market is the dominant one within these two markets; at the end of 2018, about 89% of the total bonds outstanding in China are in the interbank market, while the rest of 11% is in the exchange. Various fixed income securities are issued and traded on these two bond markets, with many multi-layer regulatory bodies interacting with each other in an intricate way.
We first elaborate on the above mentioned two bond markets in Section 2, together with various bond instruments traded there. Section 3 provides a brief history of Chinese bond markets, and Section 4 highlights their inherent connection with and the banking system, together with the internalization of Chinese bond markets in the near future. Section 5 covers the credit ratings and rating agencies, and Section 6 offers an account of ever-rising default incidents in China starting 2014. We provide some data sources for in-depth study of Chinese bond market in Section 7.