Trading value in China's interbank bond market reached USD7.2trn in 2009, a 19.7 per cent increase from 2008, according to a report by Celent.
Celent expects continued liberalisation of China's fixed income market to create new opportunities for trading.
Commercial banks and insurance companies are the largest participants in China's bond market, led by the large state-owned banks.
Celent estimates brisk growth in fixed income trading in 2010, led by a recovery in bond trading by mutual fund companies, with the share of commercial banks declining relative to other investor categories.
Trading in asset-backed securities and MBS will remain low.
"Fixed income regulation in China has the following thrusts: pushing for a variety of bond products by relaxing guarantee requirements for corporate bonds; strengthening risk controls by requesting that commercial banks provide more information on their fixed income investments; and loosening controls on foreign institutions by allowing foreign banks to conduct bond underwriting and trading," says Hua Zhang, analyst with Celent's Asia financial services group and author of the report.
China's fixed income market is divided into three levels: the interbank market, the exchange-listed market, and the over-the-counter market. The majority of new products in China's bond market come from the interbank market.
The interbank bond market in China was formed in 1997. Initially, the market served commercial banks in bond purchases and sales as well as in their adjustments of their cash supplies. Later, the market was extended to all financial institutions, including all types of funds, and non-financial corporations, totalling more than 6,000 institutions. Currently, there are more than ten types, including Treasury bonds, policy-based finance, and central bank bills in this market.
In China's securities exchange market, there are two exchange houses, the Shanghai Stock Exchange and the Shenzhen Stock Exchange. They are supervised by the China Securities Regulatory Commission. The main players in the securities exchange market are retail investors, who enter this market through the securities companies. In addition, commercial banks are prohibited from trading in the exchange houses. The over-the-counter market also mainly serves retail investors, but it has a limited range of bond products, most of which are Treasury bonds.
In 2009, the bond trading value in China's interbank bond market reached USD7.2trn, a 19.7 per cent increase from 2008. Of this amount, financial bond trading reached USD2.7trn, representing 37 per cent of the market, with a reserve of USD654.4bn; central bank bill trading reached USD2.1trn, representing 30 per cent of the market; medium-term note trading reached USD965.3bn, representing 13 per cent of the market; and government bond trading reached USD607.8bn, representing 8.5 per cent of the market, with a reserve of USD784.2bn.
The leading products in trading value growth are, in order, MTNs, corporate bonds, and financial bonds, with growth of 793 per cent, 242 per cent, and 138 per cent, respectively.
In 2009, the largest investors in the bond market were commercial banks, which took up 63 per cent of the available issued bonds. The fastest growth registered also came from commercial banks. Among commercial banks, foreign banks and rural commercial banks had the fastest growth rates in holding bonds, with 58 per cent and 45 per cent, respectively. The growth rates of credit cooperatives and insurance companies were 23 per cent and 18 per cent, respectively. There was a decline in the holding of the sinking funds bonds, which saw a drop of 21 per cent.