The People’s Republic of China’s (PRC) bond market is the largest among emerging economies in Asia, with government and quasi-government bonds heavily dominating issuance. There are six major types of instruments traded: (i) Ministry of Finance (MOF)-issued China Government Bonds; (ii) People’s Bank of China (PBC) paper; (iii) financial bonds issued by government-backed policy banks and financial institutions; (iv) corporate bonds issued by domestic corporations; and (v) commercial paper, issued by either securities firms or private corporations; and (vi) medium-term notes
There are two main bond markets: the interbank bond market and the exchange markets—Shanghai Stock Exchange and Shenzhen Stock Exchange. The interbank bond market is China’s over-the-counter (OTC) market. Interbank and exchange bond markets use different methods to serve various investors.
PRC bond markets are generally closed to foreign issuers, investors, and intermediaries, except for investments via Qualified Foreign Institutional Investors (QFIIs). QFIIs are foreign institutions allowed by the China Securities Regulatory Commission (CSRC) to invest in the local securities market. These institutions are granted investment quotas by the State Administration of Foreign Exchange (SAFE).
Securitization in any form is a new concept in the PRC. The country’s current legal and regulatory framework poses significant limitations to the implementation of standard securitization. There are legal restrictions in existing laws, such as the Company Law, which rule out the establishment of a special purpose vehicle (SPV). Other problems requiring resolution include enforceability of bankruptcy, contract, and tax laws. In 2005, the Government accelerated policy initiatives to set up the regulatory framework for securitization. As a result, domestic securitized assets grew from practically zero to almost USD2 billion (CNY 13 billion) that same year. Going forward, the pace of development in the securitization market will depend on the Government’s progress in continuing to integrate its regulatory framework governing credit markets.