CHINA’S CORPORATE CREDIT BOND MARKET: DEVELOPMENT AND POLICY ISSUES

Abstract

The rise of China as the second-largest economy in the world has spurred a rapidly growing literature on the Chinese bond market, which experienced a tenfold growth in market capitalization over the past two decades. In this paper, we provide a comprehensive overview of the corporate credit bond market in the two most active trading venues in China: the interbank market and the exchange market. First, we discuss the differences between the two markets, and present a taxonomy of corporate credit bonds traded in the two markets. Second, we discuss the different phases of liberalization, in terms of the improvement in exposure to foreign investment and the simplification of the issuance requirements of domestic firms, accompanied by the emergence of illegal trading activities. Third, we provide descriptive statistics of bond characteristics and trading activity for each of the four categories of credit bonds in China. We also introduce a set of liquidity proxies to measure liquidity levels in the corporate credit bond market. We find that the levels of liquidity, measured by each of these proxies, vary across different types of credit bonds. Fourth, we analyze the impact of policy announcements on the levels of liquidity during the various phases of foreign liberalization in the interbank market and domestic liberalization in the exchange market.