China’s bond markets show strong growth

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/31

Chinese bond markets this year have grown at about 30 % y-o-y. Since the rules on bond-issuing have been loosened, local governments have been particularly keen to issue bonds. China’s bond market is valued at around $8 trillion, making it the world’s third largest after the United States and Japan. The stock of issued bonds can be divided roughly into three categories of the same size: bonds of financial institutions, corporate bonds and government (state and local) bonds. With a few exceptions, all bonds issued in mainland China are denominated in yuan. Media reports indicate that when the yuan is incorporated into the IMF’s SDR currency basket this autumn, several other institutions (including the World Bank) plan to issue SDR-denominated bonds in China.

While there is still relatively little foreign investment in China’s markets, foreign investment has increased significantly this year for three main reasons: China has relaxed its regulations on foreign investment, yields are quite low in developed economies and investors have moved their biggest concerns over Chinese economic growth to the back burner.

As growth of the Chinese economy slows and economic structures evolve, an increasing number of Chinese firms are expected to face difficulties servicing their bond debt. This year, at least 17 firms have defaulted on either interest or principal payments. The number of defaulting firms is nearly as high as for all of 2015 and the defaults include multi-billion-yuan bond issues. Heavily indebted firms involved in overcapacity branches such as steelmaking and shipbuilding seem to be in the worst shape. Programmes to convert bond debt into company shares have generally been met with low enthusiasm in the bondholder community.

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