Skip to main content

You are here

Blog Listing Page

China’s fixed income market: A helicopter view

By Sandrine Soubeyran, director, research and analytics

China’s equity markets are rapidly opening to global investors, not least as index providers begin increasing China exposure in their mainstream indexes. But the People’s Republic’s enormous bond market is changing, too. It has already come a long way since the first bond in the market was issued in 1980. It now ranks as the third largest bond market in the world behind the United States and Japan, having quadrupled in size since 2009.


Chinese bond market has grown significantly in the last 10 years

Unique market structure

China’s domestic bond market is dominated by sovereign and regional government bonds with a growing credit sector. Investors view policy bank bonds (non-commercial, 100% state-owned banks that lend in support of government priorities) as having similar risk as sovereign bonds. Municipal bonds have been growing rapidly since 2015.

Chinese onshore bonds are mostly traded through the interbank bond market, which includes a wide range of financial institutions. Much of the outstanding debt issuance has been tilted towards short maturities, with many issues due to mature in less than four years.

Sweeping changes

China's onshore bond market has historically attracted domestic investors, but the balance has been slowly changing due to government efforts to attract a wider investor base. China’s onshore bond market is quickly liberalizing through policy initiatives, including Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes, which allow institutional investors who meet certain qualifications to invest in a limited scope of cross-border securities products.

In July 2017, Bond Connect was launched, allowing investors from mainland China and overseas to trade in each other's bond markets through connection between the related mainland and Hong Kong financial infrastructure institutions. However, limitations have hampered access for international investors. Sovereign credit risk has been difficult to assess given the potential large liabilities not reflected by the level of government debt and fiscal deficit. Also, there has not been any coverage of onshore CNY credit bonds by international rating agencies, which are in the process of getting a license. International foreign ratings agencies were recently permitted to operate in China to rate domestic Chinese issuers, but at the time of writing, none had been granted a license. Prior to the change in the rules, global rating agencies could only hold minority stakes in joint-venture operations and not issue ratings on local bonds.

Restricting off-balance sheet lending: Rising default rates

As the authorities continue to restrict off-balance sheet lending and push up funding costs, corporate bond defaults have risen six-fold since the end of 2015. And 2016 saw the largest number of bond defaults (78), which represented RMB 39.3 billion in principal amount. In the first eight months in 2018, the issue sizes were significantly larger with 60 bond defaults representing RMB 57.38 billion in principal amount.

Nearly 20% of bond defaults have been by state-owned enterprises as regulators moved away from the old model of implicit guarantees for most debt securities to allow defaults to take place.

Read the paper: Understanding China's Economic and Market Developments: Managing China's Transition Into Global Benchmarks, then subscribe to our blog using the form on the right and receive a weekly recap via email.

For more information on Fixed Income Indexes click here.



© 2018 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE GDCM”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE GDCM, MTS Next Limited, Mergent, FTSE FI and YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “WorldBIG®”, “USBIG®”, “EuroBIG®”, “AusBIG®”, “The Yield Book®”,  and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE GDCM, Mergent,  FTSE FI or YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.

All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE GDCM, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.

Blog Listing Page