China bond market and its place among world markets

The PRC bond market, along with the markets of Russia and Switzerland, is one of the few world markets on which exchange trading of such securities is carried out. A high degree of regulation, restrictions on entry into the market, the presence of several trading platforms and methods of transactions along with rapid growth, and the creation of market infrastructure create a unique atmosphere in it. 

China bond market exchanges are the most severe in the world. They appeared thanks to two wars. They present the most stringent requirements for companies wishing to conduct an IPO and are extremely regulated. This does not stop the Chinese market from growing all the time.

Market research

In 2008, a cooperation agreement was signed between the State University Higher School of Economics and the state corporation that regulates the bond market of the People's Republic of China (Chinese Government Securities Depository Trust & Clearing Corporation). The agreement provides for research by HSE staff in the study of the characteristics of the PRC China bond market, an adaptation of yield curve construction techniques, market liquidity, and microstructure research.

China's exchanges are among the toughest in the world

Compared to other large venues, the Shanghai Stock Exchange imposes stringent requirements on companies wishing to place shares. For a listing, a company must:

  • make a profit in the last three years;
  • have at least 1 thousand shareholders;
  • capitalization should be at least ¥ 30 million (about $ 4.24 million);
  • if the share capital exceeds ¥ 400 million, no less than 15% of this amount should be placed on the stock exchange.

A feature of the China bond market remains a high level of government bonds regulation. Authorities may limit the degree to which stock transactions participate in international financial relations. The government bonds also disrupt bond market processes by providing some companies with preferential treatment and artificially lowering interest rates or the price of an initial public offering.

Trade Features

The Shanghai and Shenzhen exchanges are mainly Chinese companies. The vast majority of them are fully or partially state-owned. In free float, there is only a third of the shares. The remaining two-thirds are either from state bodies or from state-owned companies. Such securities are considered bond market - private investors cannot buy them.

Market shares are divided into type A, traded in RMB, type B, where the currency is US dollars, and type H. Type H securities are listed only on the Hong Kong Stock Exchange and are intended exclusively for non-residents.

In the bond market A, only Chinese stocks are traded. Foreign investors had no access to it until 2001, after which large institutional investors, who received a special license and only within the framework of quotas allocated to them, could buy Type A shares. Since October 2014, foreign investors were allowed to trade shares in the largest companies of the Shanghai Stock Exchange through Hong Kong brokers.

Non-residents may freely purchase type B shares in the domestic bond market. Initially, they were intended only for foreigners, but since 2001 they have become available to Chinese traders. All three markets are virtually isolated from each other: conversion between shares A, B, and H is prohibited.

Chinese market on the world stage

Some analysts believe that the inclusion of China bond market in the index can be regarded as a vote of confidence in the overwhelming number of international investors of China's financial openness, and China will be able to meet all expectations.

Firstly, at present, the internationalization of the Chinese Yuan is steadily advancing. Yuan-denominated 364 Chinese bonds issued by the Chinese government. The growth in assets of global central banks in RMB exceeded 100 percent. As China's share in the global economy continues to increase, foreign investors' interest in Chinese assets is growing.

Secondly, as of the end of February 2019, the total volume of outstanding government bonds on the Chinese securities market reached almost 13 trillion US dollars. Thus, China's debt securities bond market has become the third-largest in the world, second only to the US and Japan.

A look into the future

The new privacy policy adopted in the China bond market to expand openness to the outside world of the financial sector has created a favorable climate for foreign investors. As it became known after Bloomberg Barclays, Chinese bonds are planned to be included in two more leading world indexes - JP Morgan's EmbiIndex and Russell Indexes. According to the forecast of many world banks, the full inclusion of Chinese bonds in these indices over five years will attract 700-800 billion US dollars of foreign investors investing in the Chinese bond market.

Recommendation and conclusions

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