The segmented regulatory system of the bond markets in China: current situation, causes and reform

Abstract

China’s bond market has expanded eightfold in the past decade. This rapid growth has transformed it into one of the largest bond markets globally. However, owing to the dual-track policy related to the public and private sectors during the early decades of Chinese economic reform, the regulatory regime of the bonds issued by state-owned enterprises and those that are privately owned has been treated differently and regulated by different authorities. The segmented regulation of government bonds, corporate bonds and financial bonds has seriously raised the transaction cost of issuers and motivated regulatory arbitrage as well. More interestingly, the regulatory system of China’s bond market has diversified during the past two decades. The regulatory regime of listing companies on the Chinese stock exchanges, by contrast, was unified as early as the late 1990s. Although the Financial Committee of the State Council has promised to unify the regulatory system of the Chinese bond markets since 2017, it does not appear to be easy to change the existing institution and there is uncertainty surrounding reform. Based on a detailed review of the origins and evolution of the regulatory regime of the Chinese bond markets, this article suggests that the segmented regulatory regime is rooted in the unequal status of the public and private sectors in the Chinese economy. Therefore, the pre-requisite for unifying China’s bond market regulation is the equal treatment of state-owned enterprises and privately owned companies.