The bond market is a financial market that identifies two different environments: the primary market, in which members issue new debt; and the secondary market, in which they can sell or buy debt securities. The main aim of the bond market is to guarantee a long-term funding mechanism for both private and public outflows. Traditionally the global bond market has been dominated by the Unites States; however, nowadays the US constitute less the half of the market (Pike, Neale and Linsley, 2012), while China has grown significantly.
Since the 1990s, the Chinese economy has been increasing at a rate of 10 per cent per year, and its bond market has emerged from practically non-existing into one of the main markets around the world (Goldman Sachs, 2013). According to HSBC, at roughly $4 trillion, it is currently the fourth largest after the United States, Japan and France rising at about 30 per cent a year (Financial Times, 2014). The bond market of China is developing in a more market-oriented structure, rather than towards an administrative structure.
Nonetheless, investors still have to face barriers to access China’s strong expansion through the bond market, such as the number of restrictions regarding who and how can invest, a lack of knowledge concerning the kinds of bonds existing, and other aspects of the Chinese bond market (Goldman Sachs, 2013).
The graph below shows and overview of the growth of Chinese bond market over the past 10 years, and its current global position.
Source: Goldman Sachs 2013
Segmentation of the bond market
The bond market of People’s Republic of China comprises two markets, which complement, and interconnect with each other (Bond Market Guide). They are the Exchange bond market, regulated by China Securities Regulatory Commission (CSRC); and the Inter-Bank bond market, regulated by the Peoples Bank of China. Both are essential parts of China’s financial market as a whole (ibid).
The former is a retail market, in which private and small/medium-size institutional investors trade using concentrated matchmaking method. Currently, Qualified Institutional Investors (QFII) is only allowed to access the Exchange bond market. On the other hand, the Inter-Bank bond market is an over-the-counter (OTC) wholesale market, in which one-to-one quote driven and market positioning of institutional investors take place (Bond Market Guide). Furthermore, the Inter-bank division is much larger than the Exchange sector; it accounts for over 95 percent of total trading volume (Goldman Sachs, 2013).
As China’s bond market developed, the number of bonds available has increased and became more and more diversified. The original bond categories were corporate bonds and Treasury bonds, which then evolved into a more flexible and innovative wide range variety. These include: central bank bills, policy bank bonds, subordinated bonds of commercial banks, general financial bonds, super and short-term commercial papers,...