Opinion: China’s Baffling Bond Market

Some aspects of China’s bond market are deeply puzzling to observers.

The Chinese government has over the past few years called for the country to develop a multilevel capital market, especially the bond market and stock market, driven by worries about increasing leverage. However, this push has not resulted in the expansion of direct investment in the capital market, but rather in the dramatic growth of “shadow banking.” Some estimates put the scale of shadow banking in China at 90 trillion yuan ($14.1 trillion) — a huge amount. In comparison, the size of the bond market is currently around 75 trillion yuan. This is the first puzzle — why have the funds flowing out of China’s banking system not entered its bond market?

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