China Bond Market

After years of development, China has become the world’s 3rd largest bond market after US and Japan. From 2000 to 2013, the size of China bond market has expanded by more than 10 times to near 35 trillion Renminbi ("RMB"). Though with recent opening-up of China capital market, more and more offshore investors get involved to the market, the fast-growing China bond market still keeps mysterious and unfamiliar to most international investors due to its limit access nature. The content below can offer you a glimpse of the market.

The China’s domestic bond market primarily consists of two markets: the inter-bank bond market and the exchange-traded bond market. Despite some interconnections, these markets are differentiated by investor segmentation, product segmentation and regulatory separation. 

Currently, the inter-bank bond market is much larger in terms of trading volume and is relatively more liquid than the exchange-traded bond market. With its dominant market position, the inter-bank bond market accounted for more than 90% of total bonds outstanding and 99% of trading volume at the end of September 2014.

Key information on Inter-bank bond market & exchange-traded bond market

  Inter-bank bond market Exchange-traded bond market
Market size Approximately [RMB 31 trillion] as at [30 September 2014]
(Source: China Central Depository & Clearing Co. ("CCDC") and Shanghai Clearing House)
Approximately [RMB 2.4 trillion] as at [30 September 2014]
(Data source: China Securities Depository and Clearing Co. ("CSDCC"))
Major types of products traded China 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 securities Treasury bonds, local government bonds, enterprise bonds, corporate bonds and convertible bonds  
Key market participants Commercial 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 hours 9:00 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 mechanism Trading mechanism: a quote-driven over-the-counter market between institutional investors settlement mechanism: primarily delivery versus payment (“DVP”), on either a T+0 or T+1 settlement cycle Trading 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., Ltd (中國證券登記結算有限責任公司) (the “CSDCC”) on T+1 settlement cycle
Regulator PBOC China Securities Regulatory Commission ("CSRC")
Counterparty with whom investors will trade The 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 clearing CCDC (中央國債登記結算公司) , Shanghai Clearing House (上海清算所) CSDCC
Liquidity Total trading volume from October 2013 to September 2014 was approximately RMB34 trillion (Source: CCDC) Total trading volume from October 2013 to September 2014  was approximately RMB0.4 trillion (Source: CSDCC)
Associated risks Interest rate risk, credit risk, counterparty risk Interest rate risk, credit risk, liquidity risk
Minimum rating requirements No 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 (固定收益證券綜合電子平臺), which is open only to institutional investors.  Bonds that do not satisfy this minimum requirement cannot be traded via the quote-driven platform (競價交易系統), which is open to all investors, including retail investors.
Types of debt instruments commonly seen and the issuers China 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

As at the end of September 2014, the inter-bank bond market had a diversified investor base with over 6,400 members, approximately 5,600 of which have direct access to the centralised trading system, which covers all types of financial institutions including commercial banks, securities firms, fund houses, insurance companies, plus investment vehicles such as mutual funds and pension funds. The remaining members, which include small financial institutions and non-financial enterprises, access the market through settlement agencies.

*All facts above are subject to change.

Key bond types in the China inter-bank bond market

The major types of bonds available in the China inter-bank bond market can be grouped into 6 broad categories: (i) China treasury bonds issued by the Ministry of Finance of the China; (ii) bonds issued by the PBOC; (iii) Policy bank bonds issued by policy banks, including China Development Bank, Export-Import Bank of China and Agricultural Development Bank of China; (iv) Financial bonds, including commercial bank bonds and non-bank financial institution bonds; (v) Non-financial credit bonds issued by non-financial institutional corporates, including enterprise bonds, commercial paper (“CP”), and medium-term notes (“MTN”); (vi) other types of bonds such as 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 and mortgage-backed securities.

The chart below shows the breakdown of the various types of instruments in the inter-bank bond market (Sources: China Central Depository & Clearing Co. ("CCDC") and Shanghai Clearing House as at 30 September 2014):