The Potential of China’s Bond Market

Abstract

The Chinese bond market is experiencing substantial financial growth. This is evidenced by its opening up to foreign investors who are taking advantage of new investment opportunities in China’s long-term expanding economy. There has been a change in the financial policies of China’s bond market that has permitted more outside funds to come into its market. The influx of investor financial capital into China is a sign of the national government’s drive for economic stimulus. This allows foreign investors to take advantage of the growth of China’s real estate market and the nation’s massive effort to expand and modernize its infrastructure. The Chinese bond market consists mainly of public sector entities rather than private firms. Foreign investors can purchase either bonds issued by state-owned enterprises or by local governments or their financial vehicles. While the Chinese bond market is expanding, there are problems associated with credit ratings that do not correctly reflect data regarding credit quality. This could mean more risk for bond investors than they can tolerate or afford. The Chinese bond market must also compete against bond markets in other parts of the world in regards to returns, interest rates, volatility, safety, liquidity, and marketability. While there is the potential for vast financial opportunities, there is also the possibility of high risk.