ASIFMA Paper: China Government Bond Market Roadmap – April 2014


China’s economy is at a pivotal crossroads. With its strategic emphasis on export-oriented growth, China has transformed itself into the world’s second largest economy within the last two decades, powered by a labor-intensive manufacturing sector and extensive domestic investment. However, despite its vast production capacity and trade links with global markets, China lacks depth in its financial sector, highlighted by underdeveloped capital and bond markets. For continued growth, China needs more well-developed capital markets to facilitate its transformation from an export-driven economy to a consumer-led one.

Traditionally, China has focused on equity markets and bank loans at the expense of bond markets, but fully functioning, open financial markets and efficient capital allocation depend on the strong foundation of a liquid and transparent bond market. A mature domestic bond market offers a wide range of opportunities for funding the government and the private sector as an alternative to banklending, with the government bond market typically creating opportunities for other issuers. Well-functioning bond markets are also prerequisites for relaxing capital account controls and are transmission channels for an interest rate-led monetary policy.

The lack of market-driven capital allocation, including an administrative loan and deposit rate regime, and the absence of true national treatment for foreign-invested institutions in China’s nascent bond markets – especially with respect to underwriting, market making, derivatives trading with corporate clients, and bond settlement agent licensing – remain significant obstacles to China’s further development. Detailed discussion follows of the need for well-developed government bond markets, the technical aspects crucial to functioning government bond markets, the underlying prerequisites of sound financial markets in general, China’s recent accomplishments with respect to government bond market development, and other issues for further consideration.

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