FROM BIG TO BIGGER AND MORE OPEN China’s Domestic Bond Market Development and Opening for a New Stage of Economic Development

Bloomberg L.P.

Executive summary
In a reflection of China’s rapid financial market reform and opening, the domestic bond market has grown much bigger, more sophisticated, and more open to global investors over the past four decades. Continuing bond market development and opening will be conducive to China’s economic transition to more sustainable, dynamic growth.

There is still huge potential for China’s bond market. Using major advanced and emerging markets as a benchmark, we show that even as the second largest in the world, China’s bond market can grow further in relation to the economy’s size. Another key dimension of growth is foreign participation. We estimate that Chinese bonds held by foreign investors could increase by close to 16 times by 2025.

Such growth would be beneficial to China, and attractive to foreign investors. The Chinese bond market’s imminent entry to the Bloomberg Global Aggregate Index will be an important milestone. The Chinese bond market’s massive size, diversification benefits, and higher returns are likely to draw foreign investors, which in turn can provide impetus for further market development and opening.

For the bond market to reach its potential, a number of policy measures should be taken, some in the near term. Our key recommendations include:

· Unify issuance and regulatory standards, and widen access for issuance and raise disclosure requirements for issuance;

· Work on mechanisms to improve credit ratings and corporate disclosure; speed up the process of allowing foreign credit rating agencies to enter the market;

· Widen the Bond Connect program, and relax repatriation rules;

· Expand hedging tools to manage foreign exchange risks;

Begin to take steps to remove an implicit government guarantee of Chinese issuers to allow market pricing – key for normal market functioning.

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