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Prospects and Impact of the Opening of the Mainland’s Bond Market

In recent years, the Mainland's bond market has developed rapidly, with bond issuance and outstanding amount ranked top in the world. However, the depth and breadth of the Mainland’s bond market need to be improved. Report of the 19th National Congress of the Communist Party of China put forward the concept of building a modern economic system and promoting a new stage of all-round opening up. Accelerating the opening of the bond market can enhance the efficiency of resource allocation, better serve the real economy, and accelerate RMB internationalization. Therefore, the bond market is becoming the main field of the Mainland's financial opening.

Characteristics of the development of the Mainland’s bond market

Fixed income products are the largest asset category and also important investments. As of the end of 2016, the scale of the global bond market was close to US $100 trillion, exceeding the total amount of US $67 trillion of global stock market. In recent years, the Mainland's bond market has developed rapidly and has become the third largest bond market in the world.

1. The absolute scale is expanding, and there is room for relative scale

By the end of 2017, outstanding amount of Mainland's bond market was 74 trillion yuan, increasing 16% over the same period last year, with its growth rate far higher than that of GDP. Issuance of various types of bonds amounted to 40.8 trillion yuan, up 13% from the same period last year. In terms of the relative scale, the proportion of the Mainland's bond market to GDP rose from 20% in 2011 to 90% in 2017 but still lags behind the level of 100%-200% of developed countries such as Europe and the US.

2. Structure of investors is relatively simple and trading is inactive

Major investors in the Mainland's bond market include commercial banks, securities companies, fund houses and insurance companies and etc. Commercial banks play a dominant role, accounting for over 60% of bond holdings. Commercial banks generally prefer to hold the bonds till maturity and are not interested in bond trading. The turnover rate of Chinese government bonds lies between 0.3 and 1.9, while the rates of US treasury bonds and Japanese government bonds are 12 and 6 respectively. The liquidity of the Mainland's bond market is affected by factors such as a single structure of investors, restrictions on bond borrowing, and no unified trading platform.

3. Proportion of foreign investors is relatively low

Of the outstanding amount of US$ 11 trillion of the Mainland's bond market, domestic RMB bonds held by overseas investors are 1245.7 billion yuan, accounting for about 1.85% of the whole market, far less than that of developed countries. At present, the proportion of foreign investors in German and British bond markets are 68% and 41% respectively. The number of US is 29%, but the proportion of overseas investors in Treasury and corporate bonds are about 45% and 30% respectively. In some emerging markets such as Malaysia and Indonesia, the proportion of foreign investors is also between 25%-30%. Besides, most overseas commercial investors in the Mainland's bond market are Chinese overseas enterprises.

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Content provided by Bank of China (Hong Kong)
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