Old Version

China's Bond Market Overtakes Japan's as World's 2nd Largest

Foreign investors are optimistic about China's economy, and the country benefits from an expanding bond market with more foreign investors

By Xu Mouquan Updated Jul.12

With its total bond deposit surpassing 91 trillion yuan by the end of May 2019, China’s bond market overtook Japan as the world’s second largest. The latest data also shows foreign institutional investors invested 76.6 billion yuan more in the Chinese bond market for May – 57.9 billion yuan higher than the increase in April and the sixth monthly increase in a row, reported Commerce News.

“The primary reason is that international investors are optimistic about China's economic fundamentals as well as its government’s ability to secure the economic and financial development in the long run,” Huang Guoping, a researcher with the Institute for Financial Studies, Chinese Academy of Social Sciences, told the newspaper. Also helpful is its effort to open the bond market wider to overseas investors. 

This is conducive to “maintaining a stable yuan exchange rate and helping the currency go global,” Huang said. “And expanding yuan-denominated bond issuance also channels funding for international development cooperation, such as the Belt and Road Initiative.”

When interviewed by the newspaper, Bian Yongzu, researcher with the Chongyang Institute for Financial Studies, Renmin University of China, highlighted the importance of the expanding bond market size. 

China’s financial market has an unbalanced structure with a disproportionately low share of direct financing. Bond issuance is normally direct financing, so developing the bond market is an integral part of its financial system reform. 

Moreover, the bond market is larger than the stock market, and it takes less examination and approval procedures and has a lower threshold to issue bonds than issue stocks. Companies are more willing to issue bonds.

For China’s capital market to attract more foreign institutional investors, it should develop bonds, Bian argued. Bonds are a relatively stable method of investment, so are the returns,  meaning it is easy for bonds to draw in major institutional investors. 

Globally, such foreign investors are seeking secure investments amidst rising liquidity; there is hardly any other destination that is as large as China’s bond market and that is growing at a stable rate, he noted.