May 21, 2019 05:09 AM

China to Launch Cross-Market Bond Index Mutual Funds

China’s bond markets have been segmented and regulated by multiple authorities under different rules. Photo: VCG
China’s bond markets have been segmented and regulated by multiple authorities under different rules. Photo: VCG

China plans to launch pilot bond index mutual funds that can be traded on stock exchanges or on the interbank market, a key move to interconnect the country’s segmented $13 trillion bond market.

The China Securities Regulatory Commission (CSRC), which will be in charge of reviewing registration of the funds, said in a joint notice with the central bank that the pilot program aims to better meet the needs of domestic and foreign investors in Chinese bond index products and to help promote the long-term healthy development of the bond market.

For historical reasons, China’s bond markets have been segmented and regulated by multiple authorities under different rules.

Before 1997, the two stock exchanges were the only legitimate bond markets in China. The Chinese stock market experienced an unprecedented boom in the first half of 1997, fueled by bond repo transactions that allowed investors to use bonds as collateral for borrowings from banks, the proceeds of which were channeled into the stock market.

In May 1997, the central bank, worried about the speculation-driven stock market surge, ordered all commercial banks to switch to a newly established interbank bond market. It has since become the dominant market for bond issuance and trading in China, accounting for 90% of the trading volume of onshore debt.

As a wholesale market, the interbank market is regulated by the National Association of Financial Market Institutional Investors (NAFMII), an industry association under the People’s Bank of China (PBOC), while bonds traded on the two stock exchanges are regulated by the CSRC.

Participants in the interbank market are restricted to various qualified institutional investors including commercial banks, mutual funds, insurance companies, and securities firms. The participants in the exchange bond market include both institutional players and retail investors.

Lax supervision and differing standards and requirements on debt issuance on the two markets have led to rampant regulatory arbitrage over the past few years. Companies have exploited the differences for their own benefit.

For example, some property companies, whose ability to raise money through bond sales has been curbed amid government campaigns to cool the real estate market and force corporate deleveraging, issued bonds on the exchange-traded markets, where regulations and window guidance is looser, rather than on the interbank bond market, where conditions are tighter.

Since last year, China’s central bank and securities regulator have taken steps to interconnect the segmented bond markets. The first step was to unify the vetting standards of ratings agencies in both the interbank and exchange-traded markets.

In a joint notice last September, the central bank and the CSRC issued guidelines for the ratings business to “promote the interconnection of the bond market and the orderly development of the credit rating industry.”

The PBOC, CSRC and NAFMII will work together to formulate review and registration procedures for bond rating agencies, improve information sharing, and conduct coordinated on-the-spot checks and investigations to strengthen oversight, the notice said.

Contact editor Han Wei (

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