Commentary: To Globalize the Yuan, China Must Fix Its Bond Market

For nearly 45 years since China resumed issuing treasury bonds in 1981, the nation's bond market has been under continuous development, guided by regulators and numerous financial professionals striving to blend international best practices with China’s unique circumstances. This process has led to remarkable progress, although there are still critical gaps to be addressed [para. 1].

By the end of 2024, China’s outstanding bonds totaled 177 trillion yuan ($24.41 trillion), establishing its bond market as the world’s second largest, with a value 1.31 times the 2024 GDP of 135 trillion yuan. The trading volume has improved, facilitating better liquidity, robust price discovery, and lower financing costs. China has constructed a top-tier financial market infrastructure, including a central depository system aligned with Bank for International Settlements standards, offering services like delivery-versus-payment (DVP), real-time gross settlement (RTGS), and straight-through processing (STP). Digital end-to-end services cover issuance, custody, settlement, and valuation [para. 2][para. 3].

The market also supports advancements in green and pension finance. The China Central Depository & Clearing Co. Ltd. (CSDC) championed the country’s first green-bond disclosure standard and pioneered a database for environmental impacts of green and transition bonds. Additionally, China’s government-bond yield curve is considered world-class and is integral to interest-rate liberalization. The yuan’s three-month treasury yield became the currency’s benchmark rate in the IMF’s Special Drawing Right (SDR) basket in 2016. Foreign entities are increasingly participating, with 1,158 foreign investors holding 4.21 trillion yuan in the interbank market as of February 2025; cumulative Panda bond issuance has reached 950 billion yuan [para. 4][para. 5][para. 6].

Despite these successes, challenges persist. In 2022, the IMF increased the yuan's SDR weighting to 12.28% (the third highest), yet in Q1 2025, the yuan constituted only 2.69% of global central-bank reserves, mainly due to low foreign ownership (2.7%) in the interbank bond market, compared to around 24% foreign ownership of U.S. government bonds. This discrepancy underlines the need for reforms to enhance the yuan’s global role [para. 7].

Misconceptions hinder further progress: misunderstanding the role of third-party valuation, the idea that an offshore yuan yield curve is necessary when the problem lies in onshore restrictions, confusion about the hierarchy of risk-free rates where sovereign bonds should be the standard, and the incorrect belief that the bond market’s value is purely in direct financing. In reality, 84% of bond market activity in 2022 supported indirect financing through banks [para. 8][para. 9][para. 10][para. 11].

Reform proposals include: improving gatekeeper (auditor and rating agency) selection via a bondholder voting model; harmonizing taxes on bond interest and capital gains to promote liquidity; mandating loan-level disclosure for asset-backed securities to spur market growth; standardizing local government bond disclosures; focusing on green and transition bond development; expanding bond ownership verification systems; unifying XBRL templates for disclosures; refining risk-free rate standards by overhauling the repo mechanism; and enabling broader use of derivatives, connectivity with foreign FMIs, and reviving key advisory groups [para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19][para. 20].

By advancing these reforms, China could bridge the gap between the immense size of its bond market and its global influence, building a system that is transparent, trusted, and competitive on the world stage [para. 21].