China’s domestic bond marketpg.jrj.com.cn/acc/Res/CN_RES/INVEST/2015/9/21/7882... · 9/21/2015...

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China’s domestic bond market has increased six-fold over the past decade to reach RMB40tn (USD6.3tn), making this the third largest domestic bond market in the world. We forecast it could more than triple to USD21.6tn by 2025, with bond market development being one of the key pillars of China’s financial reforms. We see this becoming one of the most important capital markets for both Chinese borrowers and domestic investors. It will also have rising importance for international fund managers, with potentially more than USD1tn of global fixed income funds flowing into China over the coming years.

China’s domestic bond market

The Next Financing Engine

Hao Tang [email protected] +852-2978-2676Goldman Sachs (Asia) L.L.C.

Kenneth [email protected] +852-2978-7468 Goldman Sachs (Asia) L.L.C.

MK [email protected]+852-2978-6634Goldman Sachs (Asia) L.L.C

GLOBAL MACRO RESEARCH | SEPTEMBER 21, 2015

Maggie Wei [email protected] +852-2978-0106Goldman Sachs (Asia) L.L.C.

September 21, 2015 China

Goldman Sachs Global Investment Research 2

Table of contents

Executive Summary 3

Eight key numbers on China’s bond market 5

Part One – The current state of China’s USD 6 tn bond market 6

Part Two – Significant potential for bond market over next 10 years 10

Part Three – An opportunity for foreign investors 14

Part Four – Beyond the banks: Need for a diverse investor base 18

Part Five – What needs to be done to improve the market? 21

Part Six – Breakdown of China’s domestic bond market 23

Box 1: Regulating the China bond market 24

Part Seven – Government related bonds the bulk of the market 27

Box 2: LGFV draft rule: A positive step towards addressing moral hazard issues 31

Part Eight – Corporate sector bonds dominated by SOEs 32

Disclosure Appendix 39

Glossary: CBRC: China Banking Regulatory Commission; CP: Commercial Paper; CSRC: China Securities Regulatory

Commission; LGFV: Local government financing vehicle; MOF: Ministry of Finance; MTN: Medium Term Note; NAFMII: National Association of Financial Market Institutional Investors; NDRC: National Development & Reform Commission;

NPL: Non performing loans; PBOC: People’s Bank of China; PPN: Private Placement Note SAFE: State Administration

of Foreign Exchange; SCP: Short-Term Commercial Paper; TSF: Total Social Financing; WMP: Wealth management

product

Notes on authorship: This report has been jointly authored by our Asia Credit strategy team and our Asia economists.

The views of the individual analysts, and their areas of expertise, are identified within; no other analyst is responsible.

The authors would also like to thank the following economists, strategy, and sector analysts for their assistance with this

publication: Steve Strongin, Francesco Garzarelli, Jan Hatzius, Charlie Himmelberg, Sandra Lawson, Katherine Maxwell,

Timothy Moe and Andrew Tilton.



Executive Summary

China’s bond market to reach USD 21.6tn by 2025

China’s capital markets have come a long way over the past ten years. Back in 2006, the

country’s bond market capitalization to GDP was 27%, and we estimated then in a global

paper that it could reach 60% by 20161. We have already exceeded that, with the total

amount of bonds expanding six-fold to reach RMB 40tn (USD 6.3tn) at the end of August

2015, equating to 62% of GDP and making this the third largest in the world behind the US

and Japan. However, China’s bond market as a share of GDP still lags behind that of other

Asian EM countries, and is substantially smaller than many DM countries. This provides

ample room for further growth, and we estimate the market could reach USD 21.6tn by

2025.

A USD 1 trillion opportunity for foreign investors…

China’s domestic bond market is largely closed, with foreign holdings of China domestic

bonds at around USD 115bn as of June, or 1.9% of the market. This reflects the restrictions

currently in place, with offshore investors required to go through one of the foreign

investment programs in order to gain access. Going forward, we expect more channels to

be introduced with enormous potential to draw in foreign investment. Should foreign

participation catch up to roughly the level of, say, Japan and Australia, equating to around

10% to 20% of GDP, that could mean more than USD 1tn of additional global fixed income

investments to be allocated to China domestic bonds in the coming years.

…alongside broader plans towards RMB internationalization

Policymakers may have concerns over the risks associated with opening of the bond

market, but we see positive benefits if appropriately calibrated. Our past research2 shows

that accessing foreign capital can diversify funding sources and introduce best practices

from different markets. In our view, allowing foreign investors better access to RMB

denominated financial investments is an important pillar for China to achieve its longer

term goals of full capital account liberalization and internationalization of the RMB. The

push for RMB inclusion into the IMF’s SDR is an indication of policymakers’ desires to

further integrate China’s financial system with the rest of the world.

Opening the market to private companies remains the big challenge

Over the past decade, a number of new products have been introduced and a broad range

of financial instruments are now available to borrowers. But despite the innovations,

government related entities still account for the bulk of the issuance, and we estimate that

state-related issuers account for 94% of total bonds outstanding. The need to open up the

market to the private sector, therefore, remains a key challenge. This will require

encouraging a more market determined pricing of credit and reducing the reliance on

implicit government support in making credit assessments – steps that should pave the

way towards expanding private sector participation.

1 See Francesco Garzarelli, Sandra Lawson, et al, “Bonding the BRICs: The Ascent of China’s Debt Capital Market”, November 20, 2006

2 See Andrew Tilton, Kenneth Ho, Sandra Lawson, Katherine Maxwell, MK Tang, et al., “Harnessing global capital to drive the next phase of China’s growth”, February 7, 2015



Banks are the biggest holders; further diversification needed

Holders of the China bond market remain highly concentrated, with commercial banks

owning 62% of the overall bond market. There is clearly considerable scope for further

diversification of the investor base, which carries a number of benefits. Having investors

with different investment objectives will allow a wider range of issuers and a wider set of

instruments to come to the market; and encouraging better access to the market will help

to channel the large savings towards more productive use. We see the biggest potential

impact to come from expansion and reforms in the management of pension and insurance

funds.

The next financing engine

The buildup of savings and drive towards interest rate liberalization will create additional

demand for yield products, and the existing limitations of the banking sector points

towards further diversification into bond financing. We expect further financial reforms will

help to drive the bond market to become the next financing engine. We believe that the

bond market will become one of the most important capital markets not only for domestic

investors, but also a market with rising importance for international investors.



Eight key numbers on China’s bond market



Part One – The current state of China’s USD 6 tn bond market

The Evolving Credit System in China

Over the past decade, China has taken enormous strides to develop its bond market. The

efforts have been in tandem with broader financial reforms, ranging from interest rate

deregulation, to the development of the offshore RMB market, to the easing of capital

controls. In a global paper written in 2006, we expected the Chinese bond market

capitalization could reach over 60% of GDP by 2016, compared with 27% when the report

was written (see “Bonding the BRICs: The Ascent of China’s Debt Capital Market”,

November 2006). It appears that we have already surpassed that target, with the China

bond market having reached 62% of GDP at the end of August 2015. In nominal terms, the

market has expanded six-fold in size to RMB 40tn at the end of August 2015, making this

the 3rd largest bond market in the world (see Exhibit 1).

Exhibit 1: China’s bond market has surged six-fold in size since 2006 China domestic bonds outstanding (RMB tn)

Source: Wind.

Despite the rapid growth over the past decade, China’s bond market is still small as a share

of GDP compared to global and regional peers. It lags behind other Asian EM countries,

such as Malaysia and Thailand, and is substantially smaller compared with DM countries

like Japan, US, and the UK (see Exhibit 2). Although a number of innovations have been

introduced into the bond market, there is still room for substantial improvements. The pace

of China’s credit growth has been rapid in recent years, with total social financing3 (TSF)

increasing at a CAGR of 22% from the end of 2006 to July 2015. As such, the growth in the

bond market has merely kept pace with the overall increase in China’s credit growth. In our

view, the bond market is not yet the financing engine that we think it can be.

As mentioned in our report back in 2006, a key factor which hampered the development of

China’s bond market was that the market was overwhelmingly concentrated in securities

issued either by the government or by publicly-controlled policy banks, whilst the

3 Total social financing is a measure of the total amount of financing the real economy (i.e. non-financial corporates and individuals) gets from the financial system. Currently the indicator mainly includes loans denominated in local and foreign currencies, entrusted loans, trust loans, bank acceptance bills, corporate bonds, equity financing,etc.

40 tn

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014 Aug-15



corporate sector was severely under-represented. The inability for private enterprises to

obtain bond market funding has been one of the factors leading to the rapid expansion of

alternative financing channels such as trusts loans. These types of financings were a

negligible part of the credit system back in 2006, but they have ballooned more than five-

fold since 2009 to now account for about 17% of China’s credit stock, although

policymakers have made recent efforts to curb their growth. As noted in our China Credit

Conundrum piece written in July 2013, certain parts of these types of financing carry

significant risks, and this is compounded by the lack of transparency in these products (see

“The China credit conundrum: Risks, paths and implications”, July 26, 2013). This is an

area that we think the bond market can play a much bigger part and serve as a substitute.

In addition, a significant proportion of trusts, entrusted loans and bank acceptance bills are

what are called “non-standard” credits, or “shadow banking” credits by many—i.e., credits

that are not booked as bank loans but are effectively intermediated and funded by banks. A

well-developed debt capital market will improve financial risk diversification.

Exhibit 2: China’s bond market still small relative to GDPDomestic debt securities outstanding/nominal GDP at 1Q15

(%)

Exhibit 3: Bonds remain a small proportion of credit Total social financing outstanding (RMB tn)

Source: Haver Analytics, AsiaBondsOnline.

Source: PBOC, Gao Hua Securities Research

Push and pull factors to drive more bond financing

The pull factor stems from the further buildup of savings, creating additional demand for

yield products. China’s gradual drive toward interest rate liberalization will increase the

proliferation of non-deposit saving vehicles. The widening spectrum of financial services to

improve the social safety net will continue to promote a rapid expansion of institutional

investors such as insurance and pension funds. These developments should create more

demand for direct financing via the bond market.

The push factor stems from the existing limitations of the banking sector. China’s

commercial banks are facing capital and funding constraints, which restrains their capacity

to create new loans. In contrast, bond financing offers many comparative advantages such

as greater transparency, broader credit risk diversification and “crowding in” (creating a

greater capacity for banks to lend to small enterprises by moving the bigger borrowers to

the bond market).

Partly reflecting these considerations, the authorities have been incrementally driving

credit flows toward the bond market with an approach known as “blocking the backdoor,

while opening up the front door”: on the one hand, the authorities have tightened

51%

0%

50%

100%

150%

200%

250%

0%

2%

4%

6%

8%

10%

12%

0

20

40

60

80

100

120

140

160

06 07 08 09 10 11 12 13 14 July2015

Corporate bondTrust loans and entrusted loansOtherRmb loansCorporate bond as % of TSF (RHS)



regulation to curb shadow banking, but on the other hand, they have also widened access

to bond issuance, notably by allowing local governments to issue municipal bonds and

some property developers to issue corporate bonds.

Financial reforms, capital account liberalization and global RMB

From a macro standpoint, as the bond market gradually overcomes existing frictions and

becomes the next key financing engine in China, we believe it will hold even greater sway

over the financial conditions of the economy.4 A well-developed bond market can also

benefit the whole financial system in China via more transparent risk pricing and more

efficient resource allocation. Further reforms to advance domestic financial liberalization

and capital account convertibility will continue, and this will push China’s debt capital

markets to the next phase of development.

Capital account liberalization has been an ongoing process for China over the past years,

with the drive further energized recently by the push for RMB inclusion into the IMF’s

Special Drawing Rights (decision scheduled for late this year). In the past few months,

several notable liberalization measures have taken place: E.g., global central banks and

sovereign wealth funds given improved access starting in July, foreigners can now directly

purchase onshore mutual funds under a new program called Mutual Recognition of Funds.

Bulk of market dominated by government-related issuers

Broadly speaking, the China bond market can be segregated into three categories –

government and municipal bonds, financial sector bonds, and corporate sector bonds.

Each of these segments occupy approximately one third of the bond market (see Exhibit 4),

which is a marked changed from a decade ago, when central government and financial

bonds represented over 90% of the market.

Exhibit 4: Corporate sector bonds, government sector bonds and financial sector bonds

each represent around 1/3rd of the bond market Breakdown of the China bond market at the end of August 2015

Source: Wind, Goldman Sachs Global Investment Research.

4 Long-term bond yields in China already seem to have been meaningfully affecting overall financing conditions in China (see Asia Economics Analyst: The long and the short of Chinese financing conditions, September 5, 2014).

Central Govt and Municipal

Bond32%

Financial Bond34%

Corporate Sector Bond

33%

Other 1%



Although it appears that this is a well-diversified market, the bulk of the bond issuance is

from government related entities. If commercial banks and corporates that have central or

local governments as major shareholders are classified as government related issuers, we

estimate that around 94% of the bond issues are by entities that are related to the

government. This means only 6% of total issuance is coming from private enterprises. We

shall discuss this further in later sections, and below is a brief summary of the various

segments within the China bond market:

Government and municipal bonds

Aggregate amount outstanding represents approximately 32% of the market as at the end

of August 2015. This segment is represented by:

Central government bonds (25% of total bond market) – bonds issued by the

central government.

Municipal bonds (7%) – the municipal bond market was expanded less than a year

ago to assist local government in their financing needs.

Financial Sector Bonds


of August 2015. This segment is represented by:

Policy bank bonds (26%) – these form the majority of financial sector bonds, and

include institutions such as China Development Bank, Agricultural Development Bank

of China and the Export-Import Bank of China.

Commercial bank bonds (4%) – the bulk of commercial bank bond issues are issued

by the big four banks, and they all have the central government as the major

shareholder.

Other financial bonds (4%) – these include insurance companies and securities

houses.

Corporate Sector Bonds


of August 2015. This segment has seen the most rapid growth and is represented by:

Enterprise bonds (8%) – this is the most established corporate sector bond market,

regulated by the National Development and Reform Commission (NDRC). Issuers are

typically large state-owned enterprises.

Corporate bonds (2%) – this market is regulated by CSRC, the stock exchange

regulator, and issuers are mostly listed companies with the bonds traded on the stock

exchange.

Corporate instruments regulated by NAFMII (20%) – NAFMII is a regulatory body

under the supervision of PBOC and the instruments include commercial paper, short-

term commercial paper, medium term notes and private placement notes. A range of

different issuers utilize this market.

Government supported company bonds (3%) – these are issued by entities that

carry strong government support, such as the China Railway Bureau.



Part Two – Significant potential for bond market over next 10 years

Bond market to reach 97% of GDP by 2025, from 54% last year

While it may take some time for the aforementioned key issues associated with the

corporate bond market to be addressed, we do see the potential of the China bond market

to expand further in the next few years. In order to quantify the potential growth of the

China bond market in the next 10 years, we conducted a bottom-up analysis and estimated

growth of each market segment in relation to the GDP. The estimation is separated into

two parts – growth issuance from the public sector, and from the private sector – and

based on our estimates, we expect the size of the market to reach 97% of GDP by 2025, or

RMB 136tn from the current outstanding RMB 40tn, equivalent to 62% of GDP.

Part One: Estimating public sector issuance

Estimating public sector issuance focuses on the growth in treasury bonds, policy bank

bonds and municipal bonds. For these bond types, we adopt the assumption that the

infrastructure spending by the government will decrease gradually, in line with the gradual

slowdown of nominal GDP growth. The backdrop of this assumption is that over the short

to medium horizon, infrastructure investment will still be one of the main supports to

economic growth, and in the long run, ongoing urbanization creates a continued need for

infrastructure spending. We also expect that over time all the existing non-bond

borrowings (such as bank loans and trust financings) by local governments will shift to

bond financing, following the Article 43 regulation issued by the state council late last year.

Treasury bond market to reach RMB 32tn by 2025. We expect Treasury bond issuance in

the next few years to be driven by the cumulative fiscal deficits. Fiscal policies will likely be

more active in the next few years, as the government takes up more social service

responsibilities in the face of slowing growth. We expect the general government fiscal

deficit to gradually increase in the next few years, and stay at around 3% in the outer years.

The implied funding need will total around RMB 33tn, out of which we assume 70% will be

sourced from Treasury bond issuance, similar to the share of Treasury bonds in the latest

budget report in 2014. This would indicate an additional RMB 23tn net increase in the

treasury bond market, and the total size of Treasury bond will amount to RMB 32tn by 2025

from RMB 9.7tn in May 2015.

Policy bank and municipal bonds to reach RMB 69bn by 2025. The growth in the

issuance of policy bank bonds and municipals will in part be due to the need for them to

support infrastructure spending, but also to replace the non-bond financings such as trusts

and other types of borrowings. We did not separate our forecasts for policy bank bonds

and municipal bonds, because these two types of bonds are both designed to finance

public sector expenditure, and we estimate that amount outstanding will reach RMB 69tn in

2025, from RMB 15tn at the end of May 2015.

The key assumptions here:

1. 30% of the general government fiscal deficits will be met by policy bank bond and

municipal bond issuance (as discussed above we expect 70% of general government

fiscal deficits to be met by treasury bond issuance).

2. Besides the additional issuance related to fiscal deficits, the future total size of these

two types of bonds will increase at a similar pace with infrastructure investment

growth, which is then projected based on our GFCF forecasts from 2015 till 2018, and

Rising fiscal deficit and

government spending

plans to drive treasury

bond issuance

Infrastructure spending

and refinancing to spur

issuance of policy bank

and municipal bonds



mapped to our nominal GDP growth forecasts from 2018 onwards5. Local government

used to rely on land sales to finance infrastructure investment, but with a cooling

housing market and the ongoing land reforms, we believe local government will be

less reliant on land sales and thus more financing will be done through other channels

such as bond issuance.

3. Current non-bond borrowing by local governments can potentially be replaced with

bond issuance in the next 10 years, in reflection of the latest fiscal reform move and

the authorities’ commitment to improve local government debt management. This

indicates a potential net increase of RMB 10 tn in overall bonds by 2025.

4. While we expect more bond issuance to finance infrastructure investment in the future,

we also build in some development of Public-Private Partnership (PPP) in the next ten

years. PPP has recently been frequently cited as a solution for financing infrastructure

projects by the policy makers recently. We believe PPP will be growing gradually in the

next ten years and assumed that around 10% of infrastructure investment/around RMB

5 tn will be financed via PPP by 2025 (which is still relatively small compared with the

amount financed via bond issuance).

Part Two: Private sector issuance to stay high, then slow down

The second part of our projection focuses on corporate bonds and financial bonds. Our

forecasts in this section excludes local government financing vehicles (LGFV)6 and policy

bank bond issuance, both of which are included in the previous section’s analysis, as they

are considered public sector borrowings. We expect the yoy growth rate for private sector

issuance to remain high for the next few years and then gradually slow down to be in line

with our expected nominal growth rate for GDP in the outer years.

Corporate bonds to reach RMB 25tn by 2025. We define corporate bonds as those issued

by SOEs and private enterprises, but exclude LGFV bonds as we expect them to be

replaced by municipal bonds going forward. Prior to 2013, the amount of corporate bonds

outstanding was increasing annually by over 30%, following the introduction of new types

of instruments and a nascent market. Since 2013, the growth rate has slowed to below 20%,

and for the first eight months of 2015, the yoy increase was 16.1%. Going forward, we are

assuming that the growth rate in the next few years will remain at a similar level as we

have seen this year (16.1%), at above the pace of nominal GDP growth. This is based on

our expectation that policy support will be in place to facilitate more corporates to access

the bond market, and that there remains a large section of the private sector that are still

underserved. For simplicity, we estimate yoy growth in corporate bond outstanding will

stay at 16.1% till 2017, and then gradually slow down till it reaches our projected nominal

GDP growth by 2022 (7.23%). From 2022-2025, we assume the growth rate for this sector

will be in line with our projected nominal GDP growth. Our projected path of growth for

corporate bonds is shown in Exhibit 5. Under this path, we estimate corporate bonds to

reach RMB25tn, or 18% of GDP, by 2025.

Financial bonds (ex. policy bank bonds) to reach RMB 10tn by 2025. This sector

comprises bonds issued by commercial banks, securities firms, and insurance firms.

5 See Global Paper No: 208: The BRICs 10 Years On: Halfway Through The Great Transformation, Dec 7, 2011 for our forecasts of nominal GDP growth in outer years

6 Until the formulation of the municipal bond market at the end of 2014, local governments in China were not allowed to borrow. Given this funding constraint, local governments set up LGFVs and utilized these vehicles to borrow money and perform some of the fiscal investments on behalf of the local governments. LGFV debts do not carry a guarantee by the local governments, and rely on implicit support. Because much of these borrowings have been used for fiscal expenditure, we consider them part of public sector issuance when we formulate our projections. Please see Part Seven of this report for a fuller discussion on LGFVs.

Government to help

private companies

access the bond market

as many underserved



Historically, the growth in commercial bank bond issuance have followed that of TSF

growth, with notable increase in issuance volume in 2008 and 2009, a slowdown in 2010

and also slower growth in 2013 and 2014. But in recent years, we have seen a much faster

pace of growth in bond issuance by securities firms. In 2006, securities firms accounted for

2% of non-policy bank financial bond outstanding, and they now represent 32% (up from

20% at the end of 2014). In fact, we have seen a 52%yoy increase in the amount of financial

bonds (ex. policy bank bonds) outstanding as of August this year, the bulk of the growth

having been driven by securities firm issuance. We view this sharp increase in securities

firm issuance over the past year as being driven by the strong performance in the domestic

equity market (before the sharp correction in 2H). Going forward, we are assuming that the

increase in financial bond issuance will be more gradual, and follow a path similar to that

of TSF growth. As such, our assumptions from 2016 onwards are similar to the

assumptions we are using to project the growth in the corporate bond market, namely that

it will increase at 16.1% yoy (above the pace of TSF growth) till 2017, then gradually slow

down until the pace of growth reaches our projected nominal GDP growth by 2022 (see

Exhibit 6). Under these assumptions, we expect the sector to grow to RMB10tn, or around

7% of GDP, by 2025.

Exhibit 5: Pace of growth to slow for non-LGFV

corporates notional outstanding yoy growth of outstanding non-LGFV corporates

Exhibit 6: Our projected path of growth for non-policy

bank financials notional outstanding yoy growth of outstanding non-policy-bank financials



Results are similar when adopting a top down approach

With our bottom up approach, we estimate that the size of the China bond market could

reach RMB 136tn by 2025, or 97% of GDP from 62% now. As a crosscheck, we conducted a

second estimation using a top down approach, using a methodology that was used in our

previous work back in 2006 to estimate the growth of the market. Under this approach, we

derived the expected overall bond market size relative to GDP using three factors: the

income level (represented by GDP per capita growth), demographics (represented by the

dependency ratio), and the degree of financial liberalization (represented by financial

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07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Forecast

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Forecast



liberalization index developed by Kaminsky and Schmukler7. Our analysis relies on a panel

of data for all G7 countries from the early 1970s to the mid-1990s, looking at the evolution

of those markets and the factors that drove their development. The bond markets of

Europe and Japan increased, on average, by the equivalent of 70% of GDP between 1970

and 1995, and we estimate that just over two-thirds of this growth can be attributed to the

expansion in income per capital. Adopting this model and using our assumptions for

China’s per capital income growth over the next decade, we arrive at a top down

estimation of the bond market size will be 99% of GDP by 2025, in line with our bottom up

estimate of 97% (Exhibit 7).

Exhibit 7: Top down approach review

Source: Goldman Sachs Global Investment Research

Exhibit 8: Projected bond market size (relative to GDP) Bond market size as percentage of GDP (%)

Source: Goldman Sachs Global Investment Research

7 The index is based on various criteria including degree of restriction in the banking sector, stock market and capital account.

Factor CoefficientProjected chg in the

next 10 yearsImplied % of GDP change

A 10% increase in per-capita GDP 2.5 8.6 21.4

A full financial liberalisation 12.2 1.0 12.2

A 1 point increase in the ’dependency ratio’ 1.8 6.4 11.6

R-SquareDurbin-Watson

Implied bond market size to GDP(%) by 2025

vs bottom-up approach projection

0.41

2.03

99

97

Top-down projection approach review

0

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40

60

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120

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Treasury bondsMunicipal, policy bank and LGFV related corporate bonds

Other corporate and commercial bank bonds



Part Three – An opportunity for foreign investors

China’s bond market still largely closed, but starting to open up

Although the China domestic bond market is one of the largest in the world, foreign

participation is minimal. Foreign holdings of China domestic bonds were around RMB

764bn at the end of June 2015, or around 1.9% of the market. The reason for the low

foreign penetration is because offshore investors are required to go through one of the

quota- and case-by-case approval- based foreign investment programs in order to gain

access. We have seen the size of the quota increase rapidly in recent years, but this is from

a very low base. While headlines on financial market liberalization in the past year have

largely focused on the equity market, we think that there is significant room for offshore

access to the bond market to increase substantially.

There are three main programs in existence allowing foreign access to domestic bonds,

namely QFII, RQFII and the PBOC bond program pilot.

1. The Qualified Foreign Institutional Investor (QFII) program. The QFII program was

launched in 2002 to allow qualified foreign investors to invest in the domestic

securities market. The program is regulated by CSRC, SAFE and PBOC, with SAFE

setting the investment quota for the qualified institutional investors and CSRC

regulating the onshore securities investments by these investors. Together with SAFE,

PBOC monitors and regulates the remittance and repatriation of funds across the

border. The authorities have been relaxing the QFII investment restrictions since March

2013. In particular, QFIIs can now apply to the PBOC for access to the interbank bond

market (while previously, they could only invest in the exchange traded bond market,

which is much smaller and less liquid). That said, although the QFII quota approved by

SAFE have been expanding fast by over 40% yoy, the scale is still fairly small at about

USD 77bn as of August ’15, and only about 10% of QFII’s $49bn net investment was in

bonds as of end-2014, with the remainder mostly in equities. The low share in bonds

owes much to the strict approval process for access to the bond market.

2. The Renminbi Qualified Foreign Institutional Investor (RQFII) program. The RQFII

program was launched in December 2011 to allow Chinese financial firms to establish

RMB denominated funds in Hong Kong, through which overseas investors can use

offshore RMB to invest in the onshore securities markets. Like the QFII program, the

RQFII program is jointly regulated by CSRC, SAFE and PBoC. The rules for the program

have been relaxed, and newly approved RQFII quotas are no longer subject to rigid

asset allocation rules. Like the QFII program, the scale of the RQFII quota is still

relatively small at USD 64bn at the end of August 2015, despite rapid growth, and net

investment is even smaller still, at about US$28bn at end-2014. There is no disclosure

on the type of assets investment through the RQFII program, though we believe that

portion invested in bonds is higher than the 10% for the QFII program.

3. PBOC bond program. This program was launched in 2010 and is separate from

QFII/RQFII. It was originally based on a case-by-case approval by the PBOC, and

investors included foreign central banks, sovereign wealth funds, insurance companies,

international organizations and offshore RMB clearing and participating banks. In late

May, the PBOC significantly loosened investment restrictions for offshore RMB

clearing and participating banks under this program, allowing them to use their bond

holdings to conduct repo financing and take the proceeds back offshore. Following up

on that, in mid-July, the PBOC further eased bond investment by allowing foreign

central banks, sovereign wealth funds and international financial institutions to

participate in onshore interbank bond market through a registration-system. These

investors tend to have particularly long-term investment mandate.



Exhibit 9: QFII and RQFII approved quota has been growing, but still relatively small

Source: CEIC, Goldman Sachs Global Investment Research.

Through the various existing programs, the total number of foreign institutional investors

allowed to invest in the interbank bond market has grown to about 252 as of Aug 2015

(Exhibit 10), and their total investment was about RMB 764bn as of June. (Exhibit 11).

While the scale has been on a fast upward trend, so far it represents only about 1.9% of the

onshore bond market capitalization; and even including offshore RMB bonds, foreign

holdings still account for only about 3% of total RMB bonds outstanding.

Exhibit 10: Foreign access to the bond market has grownNumber of foreign institutional investors allowed access to

the bond market

Exhibit 11: Foreigners’ investment in the bond market

has risen fast, although still of limited scale Data in USD bn

Source: PBOC (financial market operation report), Shanghai Clearing House.

Source: BIS.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

10

20

30

40

50

60

70

80

90

Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15

QFII approved quota (USD bn)

RQFII approved quota (USD bn equiv.)

QFII+RQFII approved quota as % of A share market cap (RHS)

51

100

138

211

252

0

50

100

150

200

250

300

2011 2012 2013 2014 Aug-150

20

40

60

80

100

120

140

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Onshore RMB bonds held by overseas entities

Offshore RMB debt securities outstanding



Enormous potential to draw in foreign investment

With the China bond market already the third largest in the world and with considerable

scope to expand further, it has the potential to become a sizeable opportunity for global

bond investors. In our view, the Chinese authorities have a strong intention to push ahead

with the liberalization of the bond market as a way to foster its development, both in terms

of size and sophistication – indeed a key policy objective that is closely intertwined with the

ongoing efforts to advance RMB internationalization.

We expect more channels will be introduced to allow wider foreigners’ access. The Chinese

authorities have announced that starting July 1, foreigners can directly purchase onshore

mutual funds under a new program called Mutual Recognition of Funds. According to the

authorities, there are currently a total of 850 onshore mutual funds with RMB 2tn in AUM

that are eligible for the program, with close to half of those equipped with a bond

investment mandate (i.e., either dedicated bond funds or “mixed” funds with stock and

bond investment). While the initial quota is set at RMB 300bn for total foreigners’ purchase

of onshore mutual funds, it will likely ramp up over time. Likewise, we expect a continued

increase in the scale of the existing QFII/RQFII and PBOC bond program. We also believe

more loosening of the investment restrictions on those programs will be likely (e.g., relax

approval for RQFII/QFII investors to access the interbank bond market, loosen lock-up and

repatriation regulations, allow wider use of derivatives), thereby making investment in the

onshore bond market even more attractive to global investors.

How much can foreign holdings grow?

To make a rough gauge on the size of potential scope for foreign participation in China’s

bond market, we took a look at current foreign participation in a few other more opened

markets.

Even if we only look at possible foreign official holdings, RMB also has a lot of room to

develop: According to IMF COFER data, foreign official holdings of RMB amounted to

around 1% of China GDP, while in countries like Canada and Australia, foreign official

investors holding is around 6-8% of GDP (see Exhibit 12) If foreign official holdings of RMB

catches up with the current size for AUD or CAD, that would imply around 600 bn USD

confirmed inflows into RMB.

More broadly, compared with the size of international debt securities denominated in other

major currencies, the scope for RMB/China bonds to rise in relevance in the world

marketplace is clearly considerable: Should RMB/China bonds catch up to roughly the level

of, say, JPY and AUD bonds in terms of foreign penetration (i.e., foreigner holdings

reaching about 10%-20% of GDP), that could mean an additional over $1tn in global fixed

income investment to be allocated to RMB/China bonds. This amount would be

significantly higher still should RMB/China bonds reach the sort of foreign penetration seen

for EUR and USD bonds (about 60-70% of GDP).



Exhibit 12: Official FX holdings of CNY at comparatively

low levels Official FX Holdings as % of GDP as of end 2014

Exhibit 13: Massive scope for global bond investment to

be reallocated to China/RMB bonds going forward… International debt securities as % of GDP as of end 2014

Source: IMF COEFR, Haver Analytics

Source: BIS, IMF, CEIC, Goldman Sachs Global Investment Research

1.1

0

5

10

15

20

25

0

5

10

15

20

25

USD EUR GBP AUD CAD JPY SWF CNY

2.10

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

GBP EUR USD NZD AUD CAD JPY CNY



Part Four – Beyond the banks: Need for a diverse investor base

Bonds held mostly by banks, pension funds likely to boost buying

Despite the rapid growth in the size of the bond market, the holders of the bond market

remain highly concentrated. According to data provided by Chinabond.com.cn (data which

we estimate represents around 80% of the bond market), commercial banks held 65% of

the overall bond market in 2006. These proportions have remained broadly unchanged,

with commercial banks owning 62% of the overall bond market in July 2015. In terms of

government bonds, the percentage is even higher, with domestic banks holding around

75% of outstanding issuance at the end of 2012, compared with a G-20 average of less than

20% (see Exhibit 14).

Creating a broader set of investors with different investment objectives though will allow a

wider range of issuers and a wider set of instruments to come to the market. We see

pension funds as probably the single largest potential boost to bond demand. First, there

remains a large scope for the assets of state-provided basic pension (“pillar 1”) to increase,

given the financing short-falls under the current pay-as-you-go system and the ageing

demographics. Second, a more systematic and professional approach to managing the

basic pension assets, could lead to a significant increase in corporate bond investment.

Third, the “enterprise annuity” segment of the pension system is a promising growth

area—it is indeed a policy priority, as the government has recently introduced tax deferral

(early this year) and relaxed the investment restrictions regarding enterprise annuity assets

(in March last year) in order to encourage a greater participation in the voluntary pension

scheme.

Exhibit 14: Commercial banks hold a much larger share of government bonds in China Share of government bonds held by banks

Source: Asia Bond Online

75%

0

10

20

30

40

50

60

70

80

We see pension funds as probably the single largest potential boost to bond demand



Exhibit 15: Bond holding still concentrated in commercial banks Bond holding breakdown by holder type

Source: Chinabond.com.cn.

We see considerable scope for other segments to increase the demand for bond holdings.

As shown in Exhibit 16, non-bank financial assets reached RMB 48tn at the end of 2014,

more than double the level at the end of 2011. We see demand for bond holdings coming

mainly from the following five broad sets of institutional investors:

Pension funds, carrying roughly RMB 3.6tn in assets. Most of them are still managed

at local government level in an unsystematic manner, and have been restricted to

invest only in bank deposits and government bonds, until recent relaxations8. There is

a part of the pension funds called “enterprise annuity”, which is essentially voluntary

company-provided pension plans (or the so-called “pillar 2” pension) and is managed

by professional asset managers subject to relatively loose investment restrictions. But

this part of the system is still relatively small, at only about RMB 600bn.

Insurance funds, carrying around RMB 11.2tn in assets. About RMB 1.1tn of this is

social insurance provided by the state (e.g., unemployment insurance). Currently,

according to CIRC, about as much as about 30% is in low-yielding bank deposits.

Collective trust funds, carrying around RMB 5.6tn in assets. Their investors are

mostly high net worth individuals with higher risk tolerance and looking for higher

returns. According to China Trust Association, about RMB 1.3tn in trust assets are

dedicated to bond investment.

Mutual funds, carrying about RMB 6.7tn in assets. They cater mostly to mass retail

investors. About 60% of their assets are invested in bonds, according to ChinaBond

data.

Wealth management products (banks-managed), carrying about RMB 15tn in assets.

They are popular alternative non-bank deposit savings vehicles for households.

Approximately 44% of their assets are invested in bonds and money market

instruments as of end 2014, according to CBRC data.

Beyond domestic non-bank investors, allowing greater participation by foreigners in the

bond market would certainly be another key element in diversifying and expanding the

investor base.

8 In August, the State Council approved basic pension funds to invest up to 30% of their assets in listed equities, equity mutual funds, mixed funds etc.

Whole market Corporate sector Whole market Corporate SectorHolder Type % % % %

Commercial Banks 62% 29% 65% 35%Funds Institutions 13% 32% 3% 12%Insurance Insitutions 7% 9% 10% 30%Special Members 6% 1% 6% 0%Exchanges 5% 20% 6% 7%Credit Cooperative Banks 2% 4% 4% 5%Others 2% 1% 0% 1%Securities Companies 1% 4% 0% 2%Non-bank Financial Institutions 0% 0% 5% 6%Non-financial Institutions 0% 0% 0% 1%Individuals 0% 0% 0% 0%

Total 100% 100% 100% 100%

(Data in RMB bn)July 2015 2006



Exhibit 16: The non-bank institutional investor base has been expanding in size

Source: CEIC, CIRC, NSSF

32

33

34

35

36

37

38

39

40

41

42

0

10

20

30

40

50

60

2011 2012 2013 2014

WMPMutual fundsFund trustInsurancePensionBanks' holding in total non-MOF bond (%, RHS)

Banks' share in non-MOF bonds (%)

Non-bank financial asset size (RMB tn)



Part Five – What needs to be done to improve the market?

Despite the rapid growth over the past decade, there is still ample scope for further

development. This includes areas such as improving market access for private enterprises,

developing a broader investor base, and improving the trading liquidity of the market.

Below are areas of improvement we have identified:

Reduce moral hazard issues – in our view, one of the reasons why the market is so

heavily concentrated by state-related entities is the implicit support that these bond

carry. The expectation that state-related entities will be supported by the government

has led to SOEs and LGFVs being able to tap the bond market, despite some of those

issuers having very weak financial performance and crowding out private enterprises.

In our view, tackling the problems of moral hazard requires reforming of the SOE

sectors, and we are seeing tentative steps in that direction. In July 2014, the State-

owned Assets Supervision and Administration Commission announced that six SOEs

have been selected for a pilot program to deepen mixed ownership reform, and further

reforms are expected. We also saw the first SOE defaulting on its bond obligation,

when wholly state-owned Baoding Tianwei Group Company missed an interest

payment in April this year on its RMB 1.5bn medium term note. We see this default as

an important step towards more reforms, and how this default will be handled could

provide us with more clues as to how over-levered SOE will resolve and restructure

their indebtedness.

Promote price-based monetary policy– market pricing has been assuming an

increasing role in allocating credit in China’s financial system. This has been led by the

shift in the PBOC’s policy framework, which has gradually been relying less heavily on

direct controls over the bank loan market (such as through loan quota and bank

interest rates) and more on price-based mechanism centering around short-term

interbank interest rate management. Nevertheless, the process is by no means

complete. While bank loan rates have been fully liberalized, bank deposit rates are still

not fully market-driven, which mutes the role of price signals and contributes to

segmentation in the credit system. Moreover, despite recent progress, there is still

scope to further enrich the PBOC toolbox to secure more effective control over short-

term rates, as well as to strengthen communication and bolster guidance to market

participants regarding monetary policy intention. For instance, the sizable interbank

rate shocks in late 2013 caused volatile responses in the bond market—such episodes

could dent bond investors’ confidence, especially as interest rate hedging instruments

are still not very liquid. A greater stability and predictability of the monetary

environment would help promote growth of the bond market.

Improve co-ordination between regulators and better investor protection –

the establishment of NAFMII and the introduction of new types of products such as

MTN and PPN have been instrumental in driving the corporate bond market

significantly in recent years, and further development will be needed. For example,

more uniform rules and approval processes between the three different regulatory

would make it easier for companies to tap the different markets. And if the market is to

become more market determined and less reliant on implicit government support, then

the regulators will need to work on improving investor protection, such as tighter

covenant packages.

Clarify bankruptcy procedures– a new Enterprise Bankruptcy Law was introduced

in 2007 and was expected to be an important step in paving the way for creditors to

pursue claims via a bankruptcy process. In particular, the law streamlined the

bankruptcy process and unified procedures for SOEs and private enterprises. However,

the implementation of the law has been a challenge. In most cases of defaults that we

have come across, the workout was conducted via out-of-court settlements. As we



noted in a study we did on offshore defaults by Chinese companies9, local government

decisions often have a large impact on the resolution process. It is therefore possible

that creditors prefer to handle stressed situations by working with the local

governments, rather than via the bankruptcy process. In our view, it is difficult for

market pricing of credit risk to develop without further clarity on the default resolution

processes. However, since March 2014, we have seen four cases of defaults in the

corporate bond market (see Exhibit 17), and these could provide clues on the

resolution processes.

Exhibit 17: List of domestic bond default cases

Source: Goldman Sachs Global Investment Research.

Improve the credit rating process – corporate bond issuers require each bond issue to be

rated by a domestic credit rating agency. However, domestic credit ratings adopt a more

“top-down” approach than international credit rating agencies, meaning that heavy

emphasis is placed upon support by the parent entities or on the scale of the companies.

This can be seen in the LGFV bond ratings. As we noted in the China credit conundrum

piece we published in July 2013, LGFV bond issuers have very weak financials, and

therefore should carry low credit ratings. However, they are able to achieve domestic

ratings of AA- or above, as government support is incorporated, even though LGFV bonds

do not carry any explicit support from the local governments. This contrasts with

international rating agencies, which adopt a more “bottom-up” approach by looking more

at the standalone credit strength of the issuer. Whilst we believe that many of the state-

related entities do benefit from high levels of implicit support, allowing more

differentiation in credit ratings will help in better achieving a market determined pricing

mechanism.

Exhibit 18: Rating agencies ranked by est. market share as of August 2015


9 see “Recovery on China High Yield: May be greater than you think”, Asia Credit Line, November 10, 2011

Date Issuer SOE/PrivatePrincipal/interest

defaultBond type

Principal amount

March 7, 2014 Shanghai Chaori Solar Private Interest Corporate bond RMB 1bn

April 7, 2015 Cloud Live Technology Group Private Principal Corporate bond RMB 480mn

April 21, 2015 Baoding Tianwei Group Company SOE Interest Medium term note RMB 1.5bn

May 28, 2015 Zhuhai Zhongfu Private Principal Corporate bond RMB 590mn

Shanghai Brilliance,

9%

Dagong Global Co., 20%

China Lianhe Co.25%

Pengyuan Co., 7%

China Chengxin Co., 38%

Other, 1%



Part Six – Breakdown of China’s domestic bond market

China’s domestic bond market has changed significantly over the past decade. At the end

of 2006, the market size was below RMB 7tn, and the market was dominated by two types

of bonds – treasury bonds and financial bonds – that accounted for around 90% of the

overall bond market, with minimal contribution from the corporate sector. Since then,

annual issuance has grown rapidly. In 2006, annual new issuance of domestic bonds was

Rmb 2.4tn, and this increased by five-fold to reach Rmb 11.3tn by the end of 2014 (see

Exhibit 19). The strong increase in issuance has meant that the total amount outstanding

reached RMB 40tn at the end of August 2015.

Treasury bonds remain one of the largest parts of the bond market, accounting for 25% of

outstanding issues, though its market share has been steadily dropping. In 2006, treasury

bonds accounted for 54% of all outstanding bonds, but as Exhibit 19 shows, annual

treasury bond issuance has shown little growth, and has remained range bound between

RMB 1tn to Rmb 2tn each year. Financial bonds remain a significant part of the bond

market, accounting for 34% of the total market, compared with 38% in 2006. The most

meaningful growth has come from the corporate sector, which includes state-owned

enterprises, private companies and LGFVs. They now represent 33% of the market,

compared with just around 10% in 2006, making this the area the fastest growing sector.

Exhibit 19: Corporate sector issuance has been growingHistorical issuance (RMB tn)

Exhibit 20: Treasury and financial bonds still account for

59% of the bond market Breakdown of bond market as of Aug 2015

Note: Corporate sector bonds include Enterprise Bonds, Corporate Bonds, MTN, CP, PPN, Govt Supported Entity Bonds, and Convertibles.

Source: Wind.

Note: Corporate sector bonds includes Enterprise Bonds, Corporate Bonds, MTN, CP, PPN, Govt Supported Entity Bonds, and Convertibles.


0

2

4

6

8

10

12

06 07 08 09 10 11 12 13 14 Jan-Aug2015

Other

Corporate Sector Bond

Financial bond

TreasuryTreasury

25%

Municipal7%

Financial Bond34%

Corporate Sector Bond33%

Other 1%



Box 1: Regulating the China bond market

There are two layers of regulations regarding the China bond market – by markets, and by types of products. A large

number of regulators are involved, adding to the complexity of the market. This reflects the piecemeal developments

that have taken place over the past decade, as regulators introduced different products to address various financing

requirements and the changing investment needs of bond investors.

Regulating the trading of China bonds

There are three channels for China domestic bonds to be traded – in the interbank market, on the stock exchanges, and

OTC – and each have their own set of restrictions, as not all products can be traded through all three channels. Below

are brief descriptions of each market, using data from Chinabond (which we estimate aggregates to around 80% of all

bonds outstanding in China) as at the end of August 2015.

Interbank Market – around 93% of the bonds are registered under the interbank bond market. These are bonds that

are traded between banks, and with banks being the largest holders of China domestic bonds, the trading volume in

this market is far higher than for the other markets. Regulations were relaxed in July this year, with the PBOC

allowing foreign central banks, supranationals and sovereign wealth funds to access the interbank market. A wide

range of products can be traded in the interbank market including government bonds, central bank bonds, policy

bank bonds, financial bonds, enterprise bonds, MTN and commercial paper.

Exchange traded market – around 4% of the bonds are registered under the exchange traded market, and the

major participants in the exchange traded markets are non-bank financial institutions. The products that can be

traded in this market include government bonds, enterprise bonds, MTN and corporate bonds.

Over-the-counter (OTC) – around 3% of bonds outstanding are registered as under the OTC market. The OTC

market allows banks to trade bonds directly with non-bank investors. Initially trading in the OTC market was

restricted to government bonds, but over the past 18 months, this was expanded to include policy bank bonds and

enterprise bonds.

Regulating the issuance of China bonds

In addition, there are a number of regulators regulating the different types of financial products that are currently

available (see Exhibit 21). Depending on which product an issuer is seeking to bring to the market, they may require

approval from more than one regulator.

Exhibit 21: Regulators of the China bond market

Source: Chinabond

Regulator

PBOC

CSRC

PBOC

Regulator

PBOC, MOF, CSRC

PBOC

Policy Bank Bond, Special Financial Bond PBOC

Commercial Bank Bond, Non-Bank Financial Institution Bond CBRC, PBOC

Securities Firm Bond, Securities Firm Commercial Paper PBOC, CSRC

NAFMII

CBRC, PBOC

NDRC,PBOC,CSRC

PBOC, MOF, NDRC, CSRC

PBOC, CSRC

CSRC

Stock Exchanges

OTC Market

Exchange Bond Market

Interbank Bond Market

Market Type

Bond type

Convertible Bond

Listed Corporate Bond

Privately Placed Small and Medium Enterprise Note

Government Bond

Central Bank Bond

Financial Bond

Commercial Paper, Medium Term Note, Private Placement Note

Asset Backed Securities

Enterprise Bond

International Institution Bond



Maturity profile marginally shortened as corporate issuance rose

Through the course of these developments in the bond market, the average maturity

profile of bond issuance has fallen. In 2006, the weighted average maturity for new bonds

issued was 5.3 years, and this has shortened to 4.3 years in 2014. A closer look at each

segment shows the average maturity for Treasury bonds issued in 2006 was 5.0 years, and

this has lengthened to 7.5 years for Treasury bonds issued in 2014. This was more than

offset though by the shortening of maturity in the financial and corporate sectors. The

average maturity for newly issued financial bonds decreased from 6.0 years in 2006 to 4.3

years in 2014, and for corporate sector bonds from 4.4 years to 3.3 years. The maturity

shortening in the corporate sector was driven by a combination of the introduction of

shorter-dated instruments and the shortening of maturity for enterprise and government

supported bonds, and the prevalence of very short-dated CP and SCP issuance. As we shall

we in the later sections, the buyers for onshore bonds are still dominated by banks, which

we believe have a preference for shorter-duration assets. We think that for average

duration to increase, we need to see a broader based set of institutional investors, such as

pension and insurance funds, to participate in the market.

Exhibit 22: Average maturity decreased since 2006, driven by financial and corporate

sector bonds Average maturity (years) weighted by issuance amount


Offshore bond issuance still relatively small despite rapid growth

The rapid increase in domestic debt issuance has taken place alongside a similarly rapid

increase in offshore debt issuance. As Exhibit 23 shows, prior to 2010 the volume of

offshore debts issued by Chinese entities was minimal, but there has since been a notable

increase. The fastest growth came from the issuance of G3 currency bonds by Chinese

entities, with USD 76bn of new issuance in the first eight months of 2015, becoming the

largest source of G3 currency bond issuers in Asia. Second, the introduction of CNH bonds

has provided an additional avenue for Chinese issuers to borrow in the international bond

market. A combination of factors has driven the strong increase in offshore issuance in the

last few years. It offers Chinese companies a more diversified source of funding, and ability

to access the global saving pool; domestic bonds have relatively short maturity profiles,

and issuing offshore allows corporates to extend the duration of their borrowings; and the

offshore market has a much more developed high yield market, enabling higher risk

companies to issue bonds.

0

2

4

6

8

10

12

14

16

18

CP ABS PPN Corp. FinancialBond

MTN Muni Enterp.Bond

Treas. Gov .supported

200620142006 average2014 average

2006: 5.3 yr

2014: 4.3 yr



It is worth noting that, despite the rapid growth, the size of the offshore bond market is still

relatively small. With around USD390bn of offshore bonds outstanding, this is only around

6% of the USD6.3tn-equivalent outstanding in the domestic bond market. But the strong

growth in offshore bond issuance indicates the broader financing needs from private

enterprises, and emphasizes opportunity for the domestic bond market to further open up.

Exhibit 23: Offshore issuance seen notable pickup since

2010 China historical issuance in the offshore bond market as of

Aug 2015 (USD bn or equivalent)

Exhibit 24: Breakdown of China offshore bond markets as

of Aug 2015

Source: Bloomberg, Goldman Sachs Global Investment Research.

Source: Bloomberg, Goldman Sachs Global Investment Research.

76

20

0

20

40

60

80

100

120

140

160

180

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD

Offshore CNY bond

G3 currency bond

HY, $91bn, 23%

IG, $229bn, 59%

Soveregin, $1bn, 0%

Financials, $48bn, 13%

Corporates, $21bn, 5% 05

Offshore CNY

Offshore CNY

G3 Currency



Part Seven – Government related bonds the bulk of the market

Despite the rapid increase of corporate bond issuance, China’s bond market remains

dominated by bonds issued by government related entities. Treasury bonds, municipal

bonds, and policy bank financial bonds in aggregate represented Rmb23tn of outstanding

bonds at the end of Aug 2015, or 58% of the market. In addition, bonds issued by SOEs

(which are corporates and commercial banks with significant government ownership)

account for 24% of the market and local government funding vehicles (LGFV) are another

11%. Therefore in aggregate, government related issuers account for 94% of the bond

market – meaning that only 6% of the entire China bond market is from private enterprises.

We expect government related bonds will continue to be a dominant feature of China’s

bond market, providing an important funding channel for the both the central and local

governments.

Exhibit 25: Public sector issuance accounts for 58% of total bonds outstanding; 94% if we

include SOEs and LGFVs as public sector Bond market issuance by private and public sectors, Aug 2015 (%)


MOF and policy bank bonds form the backbone of the bond market

Central government (or MOF) bonds and policy bank financial (PBF) bonds are the two

most important segments of China’s bond market. Given the volume, liquidity and

relatively strong credit profile of these bonds, their yields are often regarded as the

benchmark in pricing corporate bond issues.

The increase in MOF bonds has been largely driven by (on-budget) fiscal deficits. We

believe the ongoing urbanization drive and social safety net reinforcement would imply

continued strong demand for fiscal resources, thus a steady supply of MOF bonds, in the

years to come.

Treasury, 25%

Municipal, 7%

Policy Bank, 26%

LGFV Bond, 11%Commercial

Bank and other financials (SOE),

6%

Non-LGFV Corporates (SOE), 19%

ABS, 1% Non-LGFV Corporates(Private Enterprises), 3%

Commercial Bank and other

financials(non SOE), 2%

Public Sector

State-owned Borrowers

Private Sector



PBF bonds have also increased rapidly, with the outstanding stock expanding by an

average of roughly 20% per year in the last five years. This partly reflects the major role of

policy banks in supporting the implementation of important policy plans. For instance, last

year the State Council tasked the China Development Bank to set up a specialized unit to

arrange financing for urban redevelopment and social housing construction. Going forward,

we expect policy banks to continue to be a key financial intermediary channeling funding

sourced from the bond market towards various policy-priority areas.

LGFV bonds have risen rapidly…

LGFVs were the main vehicles for local government borrowing. Whilst central

government has the ability to fund through the issuance of MOF bonds, local governments

in China had, until recently, been restricted from borrowing. This was problematic for local

governments, as they were tasked with carrying out much of the country’s fiscal spending

post the onset of the Global Financial Crisis, and funding was a constraint given their

inability to borrow. To get around this, the local governments set up local government

funding vehicles, or LGFVs. These are companies wholly-owned by the local government,

and are vehicles that can borrow money and invest on behalf of the local governments.

The LGFV bonds are not formally guaranteed by the local governments, and such debts are

not included as part of local government budgets. Buyers of LGFV bonds and the domestic

credit rating agencies rely on implicit local government support to provide the credit

support for these entities.

And they have become a large “corporate” bond issuer. Local governments had relied

heavily on LGFV borrowing in recent years, and we estimated total LGFV debts outstanding

amounted to over Rmb 21.5tn or 34% of GDP at the end of last year. While most of such

borrowing was done through bank loans, a significant portion of the funding came through

LGFV bond issuance. In fact, annual LGFV bond issuance represented over 1/3rd of total

corporate sector issuance in 2014 (Exhibit 26). We estimate that there is Rmb 4.5tn of LGFV

bond outstanding at the end of Aug 2015, or 11% of the bond market.

Exhibit 26: LGFV bond issuance risen sharply in recent years LGFV issuance as % of total corporate sector issuance 2008-Aug 2015

Source: Wind.

35%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2008 2009 2010 2011 2012 2013 2014 Jan-Aug2015



… but shift to municipal bonds to help lower financing costs

Beijing pushing for a new fiscal regime; municipal bonds to play a key funding role.

The use of LGFVs created a number of challenges. There is moral hazard risk given the

LGFVs’ reliance on implicit government support, and as LGFV debt is not part of local

government budgeting, this introduced a layer of opacity to government financials. To

address this, policymakers have introduced various measures. In May last year, the

Ministry of Finance introduced a local government bond pilot program, allowing ten

provinces/cities to issue municipal bonds. This was followed by a new budget law passed

in August 2014 and a State Council guidance on local debt management in October 2014

(Article 43). These provided a broad basis for provincial-level local governments to issue

municipal bonds to finance part of their infrastructure investment. The outline of the

October guidelines is shown on page 31, and these guidelines require, among other things,

that local governments should raise debt in a prudent manner under pre-approved quotas,

and must no longer conduct financings through LGFVs to fund new government projects

(although some LGFVs continue to operate to invest in more commercially viable projects).

The main aim is therefore to shift local government financing towards the municipal bond

market, and this has the advantage of lowering local governments’ funding costs, as well

as bringing such borrowings “on balance sheet” and become part of local government

budgets.

Two types of municipal bonds have been formulated: general municipal bonds and

specialized municipal bonds. The former is intended to fund low-returns projects with

limited cash flows, and the local governments are expected to use general fiscal resources

to pay interest and repay the principal. The specialized municipal bonds, on the other hand,

are explicitly backed by the underlying projects that are expected to generate sufficient

returns and cash flows to meet the debt obligations. In terms of the scale of issuance, the

central government had initially announced a quota of RMB 1tn for the “debt swap”—

using the proceeds from municipal bonds to repay part of the maturing LGFV debt; and

another RMB 600bn to finance new flow of local government investment.

The municipal bond program is off to an encouraging start despite initial worries. The

nation-wide municipal bond program had been initially delayed because of concerns that

such large issuance could lead to significant bond market indigestion. However, thanks to

the PBOC’s supportive monetary stance and Beijing’s administrative facilitation (notably

permission for some of the municipal bonds to be privately placed instead of openly

auctioned), provincial level local governments have successfully issued first batches of

municipal bonds, generally at yields fairly close to those on central government bonds10.

Given the positive outcome, the central government has twice increased the debt swap

quota to RMB 3.2tn for this year, from an initial RMB 1 tn.

LGFV bond issuance channel will likely stay open

Despite the central government’s intention to curb LGFV issuance, they have so far allowed

some leeway for LGFVs to continue borrowing, including through the bond market, and

rolling over debt in order to ease the transition to the new fiscal regime. This can be seen

from the new issuance pattern for LGFV bonds. There was a notable drop off in the volume

of LGFV bond issuance following the announcement of Article 43 in October 2014, though

monthly issuance has picked up from March this year (see Exhibit 27).

We think the pickup in LGFV issuance in recent months reflects a slightly looser policy

stance to ensure that local governments are sufficiently well funded. Looking at the use of

10 In recent weeks, those municipal bonds auctioned in open markets have been issued at yields about 30bp above those of central government bonds.



proceeds, of the approximately RMB 654bn of LGFV bond issuance between March and

Aug this year, we estimate around 50% were used for refinancing existing debt (particularly

bank loans) (see Exhibit 28). This suggests that bond issuance remains an important

channel for LGFVs to roll over their debt, given that the municipal bond program and the

“debt swap” discussed above are still at early stages. For this reason, we think the LGFV

bond channel will remain open in the near term to contain any widespread refinancing

risks, and until there is more substantial progress in growing the municipal bond market

and other funding models such as PPP.

Exhibit 27: LGFV bond issuance tapered off after Article

43 while municipal bonds have risen. Monthly LGFV and municipal bond issuance (RMB bn)

Exhibit 28: Refinancing accounted for around 50% of Mar-

Aug’15 issuance amount Breakdown of Mar-Aug’15 LGFV bond issuance amount by

use of proceeds

Note: For bond proceeds with multiple usages, we identify the main usage by amount for the calculation.

Source: Wind.


0

100

200

300

400

500

600

700

800

900

Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15

LGFV bond issuance

Municipal bond issuance Article 43(October 2014)

Other0.4%

Use of proceeds info not

available20%

Refinancing existing

debt52%

Specific project use

15%

Working capital needs and general

corporate use13%



Box 2: LGFV draft rule:

A positive step towards addressing moral hazard issues

Moral hazard, namely the implicit support by central and local governments on different types of debt issued by state-

related entities, is in our view a key impediment to the development of a more market based pricing of credit. A

noticeable development came in October 2014, when China’s State Council announced new guidelines (“Article 43”) to

strengthen the supervision and management of local government borrowings. It states that the local government

should not be responsible for repaying debts of enterprises, and in turn, local governments should be responsible for

their own debt obligations, i.e. they should not expect a rescue from the Central Government when facing difficulties in

debt repayment.

The key provisions under Article 43 include:

Local governments should raise debt in a prudent manner under pre-approved quota approved by the State Council

Funds raised from debt issuance can be used to fund non-profit public services and pay off existing debt, but

cannot be used to fund regular operational expenses

Local governments may no longer borrow money through LGFVs or other corporate channels

Local governments are responsible for their own debt obligations and should not expect a rescue from the Central

Government when facing difficulties in debt repayment

Local governments with trouble repaying the debts should reduce the size of construction projects, cut

administrative spending, sell existing assets, etc. to meet repayment obligations

Local governments must no longer conduct financings through LGFVs, though the guidelines do provide a number

of important caveats.

The key to its effectiveness depends on the pace of implementation – if firmly followed through, this could have a

negative impact by introducing too much credit risk over a short time frame, but if not strictly implemented, the

guidelines would lose efficacy. The evidence so far suggests that progress will be gradual, in line with our initial

assessment. For example:

1. A key concern with the guidelines was how maturing existing LGFV debt could be repaid. If LGFVs no longer benefit

from implicit government support, it is unclear if lenders will be willing to extend credit to these entities. To address

this problem, policymakers announced a debt swap program in early 2015, allowing local governments to issue

municipals to repay RMB 1tn of maturing LGFV debts. This has since been expanded twice and the size of the

program has reached RMB 3.2tn. This means that a “tail” scenario of significant LGFV debt defaults are unlikely, at

least in the near term.

2. The several months post the announcement of Article 43 saw a noticeable fall in LGFV bond issuance given the

uncertainties introduced by the new guidelines. But LGFV bond issuance has picked up in recent months. Although

local governments can no longer borrow via LGFVs for capital spending, these LGFVs can still issue debt if they

operate projects on a commercial basis and creditors are comfortable that the LGFVs can repay the debts. In

addition, even though local governments will not be able to repay newly incurred LGFVs debts, they can still

provide assistance to LGFVs via other means (for example if the LGFV still has legacy public sector projects). It is

with these reasons that LGFVs have been able to issue bonds in the USD market11.

Although the examples above indicate that changes are likely to take place at a gradual pace, they are positive steps in

the right direction. They improve the accountability of local government finances, help to define the responsibilities of

the central government, local government and enterprises on future indebtedness, and are a meaningful step towards

addressing moral hazard risks.

11 See “The risks in offshore LGFV debts and their support agreements” Asia Credit Line, April 23, 2015



Part Eight – Corporate sector bonds dominated by SOEs

China’s corporate bond market has been in existence for over 30 years, despite only

showing rapid growth since 2006. According to the China Securities Regulatory

Commission (CSRC), several enterprises began raising unregulated interest-bearing funds

in 1982, and by the end of 1986, these bonds reached more than USD 2.9bn in outstanding

amount. Regulation was introduced in 1987, with bond issuance subject to approval by the

PBoC, State Planning Commission (now known as the National Development and Reform

Commission, or NDRC) and the MoF, and an annual quota was set. This laid the foundation

for the Enterprise Bond market, with annual issuance of Enterprise Bonds reaching a peak

of USD 12.7bn in 1992. However, according to the CSRC, many issuers were unable to

repay the bonds and subsequently defaulted during the 1990s. The Enterprise Bond from

the early days carried bank guarantees, and the losses were carried by the banking sector,

but these events did lead to a long period of decline in issuance volume.

The decline in corporate bond market activity reversed course in 2005, with the

introduction of commercial paper and other new types of instruments in the subsequent

years. But despite the growth in the past decade, the corporate bond market remains

largely a state-related market. We estimated that around 94% of the outstanding corporate

bonds at the end of August 2015 were issued by LGFVs or SOEs. Therefore the bond

market developments have not been able to help finance the privately owned enterprises,

and this resulted in the rapid growth in the trust financing market, which was a much

easier channel for private enterprises to borrow from. We believe that a number of

developments will be required if the market is to become more open to privately owned

enterprises.

Exhibit 29: Corporate sector bonds have exhibited rapid growth Corporate sector bond notional outstanding (RMB tn)

Source: Wind.

A fragmented corporate bond market with three regulators

The oldest corporate bond market in China is the Enterprise Bond market. As discussed

above, this market was regulated by the NDRC, and saw little growth in the years leading

up to the mid-2000s. Part of the reason for the slow growth was the spate of defaults seen

during the 1990s, and also the regulatory burden – issuers needed regulatory approvals if

they are allowed to issue in the Enterprise Bond market, and this market has been largely

utilized by SOEs.

0

2

4

6

8

10

12

14

2006 2007 2008 2009 2010 2011 2012 2013 2014 Aug-15

China’s bond market has been largely inaccessible for private sector financing, forcing them to rely on trust loans



An important development took place in 2005, with the PBoC introducing the Commercial

Paper (CP) market, marking the beginning of a new era for China’s corporate bond

development. Unlike the Enterprise Bond market, CP issuers only need to go through a

registration process, without the need for regulatory approvals. In addition, non-state

owned entities were allowed to issue in the CP market. Although CPs are short dated with a

maturity of less than 1 year, the much reduced regulatory requirement led to their rapid

increase in issuance. The pace of growth accelerated in 2007, with the formation of the

National Associate of Financial Market Institutional Investors (NAFMII), a self-regulating

organization established by the PBoC which took over the oversight of the CP market. They

wasted little time in introducing new products, such as Medium Term Notes (MTN) in 2008

and more recently, Private Placement Notes (PPN) in 2011.

A third corporate bond market was introduced in 2007, with the establishment of the

Corporate Bond market. This market is regulated by the stock exchange regulator CSRC,

and allows for companies to issue bonds that are tradable on those exchanges. The growth

of this market has been less rapid than with the CP/MTN/PPN market, as bond issuers

needed CSRC approval for issuance. In addition the majority of bonds in China are traded

in the interbank market, rather than exchange traded, meaning that liquidity on exchange

traded bonds was relatively low. The details of the three regulators are shown in Exhibit 30.

Exhibit 30: Details of the three corporate sector bond regulators

Source: NDRC, CSRC, NAFMI.

Reduced regulatory burden led to significant growth in new

products

The introduction of CP by the PBoC in 2005 and the setting up of NAFMII in 2007 led to a

period of rapid growth and innovation in the corporate bond market. By the end of 2006,

the amount of CP outstanding has already overtaken the amount of Enterprise Bonds

outstanding, which has been in existence for far longer (see Exhibit 31). By Aug 2015,

products regulated by NAFMII accounted for 61% of the corporate bond market, with a total

amount outstanding of RMB 7.8tn (see Exhibit 32). This includes CP (maturity shorter than

NDRC CSRC NAFMII

General InformationFull Name National Development and Reform

CommissionChina Securities Regulatory Commission

National Association of Financial Market Institutional Investors

Overseen by State Council State Council PBoC

Founded in 1952 1992 2007

Macroeconomic policymaking Overseeing securities and futures market Promoting development in OTC market

Monitoring economic performance Regulating secuties issuance and trading Rulemaking and implementation

Guiding and promoting reformsSupervising exchanges and market participants

Protecting member interest

Approving construction projects Investigating violation of laws and regulations Educating members and mediating disputes

Role in bond market

Regulated marketEnterprise bond Corporate bond

Medium-term Notes, Commericial Paper, and Private Placement Notes

Directing issuance to support macro policy Supervising the trading of bonds Enforcing issuer information disclosure

Any other measures to ensure market health Any other measures to ensure market health Any other measures to ensure market health

Main Functions

Common Responsibilities

Additional Responsibilities

Enacting policies and rules regarding bond issuance

Supervising bond issuance (eligibility, pricing, etc.)

Ongoing monitoring of the bond market



1 year), Short-term Commercial Paper (maturity shorter than 270 days), MTNs (maturity

longer than 1 year but under 5 years) and PPNs (same maturity profile to MTNs but

requiring lower level of disclosure and more relaxed leverage requirements as these are

placed privately to institutional investors).

Exhibit 31: Not many instruments back in 2006 Breakdown of corporate sector bonds by type in 2006

Exhibit 32: New instruments have been invented Breakdown of corporate sector bonds by type as of Aug 2015

Source: Wind.

Source: Wind.

More credit risk has been introduced, albeit slowly

The introduction of new products, and allowing a more diverse range of bond issuers, has

meant that more credit risk has been introduced. Exhibit 18 shows the breakdown of the

credit ratings by bond issuers (and note that this chart excludes CP ratings, because CPs

are short dated instruments and hence follow different rating scales to longer dated bonds).

At the end of 2006 and similarly in 2007, nearly 90% of rated corporate sector bonds are

rated AAA, which is not surprising given that the bond market (excluding CPs) were

dominated by Enterprise Bonds, which are usually large SOEs and many of which carry

bank guarantees. The introduction of new financial instruments and a broadening of the

range of issuers led to a noticeable drop in the proportion of rated bonds at AAA, falling to

below 50% by 2012. But since 2012, the percentage has hovered around the 50% level,

indicating that more work needs to be done if the trend in introducing more credit risk is to

continue.

Enterprise bond, 41%

CP, 45%

Govt supported,

10%

Convertible, 4%

Enterprise bond, 23%

Corporate bond, 7%

MTN, 29%CP, 7%

SCP, 10%

PPN, 15%

Govt supported,

9%

Convertible, 0%



Exhibit 33: More credit risk has been introduced to the corporate bond market Breakdown of corporate sector issuance by rating (%)

Source: Wind.

Differentiation in credit spreads becoming more apparent

Although the market is heavily concentrated by issuers rated AA or above, we have seen a

marked divergence in the pricing of credit. As shown in Exhibit 34, there has been a

notable widening of credit spreads for bonds rated A+ or below, whilst spreads for bond

rated AA- or above have remained relatively stable. This is in line with our expectation of

more credit differentiation, a view we highlighted in our China credit conundrum piece in

July 2013 (see “China Credit Conundrum: Risks, paths and implications”, July 26, 2013). In

our view, this reflects the market’s concerns regarding riskier credits, despite the fact that

lower rated credits remain a relatively small part of the overall bond market. We think this

is also impacted by recent defaults. We saw the first corporate bond default in March 2014,

followed by a period of calm with little default news. But more recently, in April and May

2015, we saw three new cases of defaults, including the first SOE to default on their

onshore bond obligation (see “A 4th domestic corporate bond default in China; looking for

clues on resolution processes”, Asia Credit Trader, May 29, 2015).

93% 96%87%

73% 68%58%

49% 51% 46% 52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD

AA- or below AA AA+ AAA



Exhibit 34: Increasing differentiation in spreads across ratings Credit spread by rating in bps

Source: Wind.

Market still dominated by SOEs

As mentioned previously, the bulk of the corporate sector issuance has come from

companies that are linked to the government, namely SOEs and LGFVs. We think there are

a couple of reasons for their prevalence:

1. Firstly, SOEs are some of the largest companies in China, with sizeable financing needs,

and therefore they are more likely to utilize the bond market to diversify their funding

sources. One can see this by looking at the biggest issuers, with all of the top 50

issuers last year being SOEs (see Exhibit 35).

2. Second, and perhaps more importantly, moral hazard remains a key issue in the China

credit markets, with creditors preferring to lend to companies that carry strong

“implicit” support by the government. This leads to distortion of the capital markets,

with larger, state-related entities “crowding out” smaller, privately-owned firms.

0

200

400

600

800

1000

1200

Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

AAA

AA+AA

AA-

A+

A

A-

BBB+

AAA-



Exhibit 35: The top 50 issuers in 2014 are all SOEs

Source: Wind.

….curbing of trust financings should open access to the bond

market for private enterprises

In our view, the lack of bond market access for private enterprises is one of the reasons

why there had been such a strong growth in the trust financing market in the last few years,

as the trust market was one of the few financing channels available in China for non-state

related entities. At the end of 1Q10, the amount of outstanding trust assets was Rmb2.4tn,

and this has since grown to Rmb15.9tn by the end of 2Q15. Over the same period, the

growth in the corporate bond market was notably lower, increasing from Rmb2.9tn to

Rmb12.5 tn (see Exhibit 36). However, since the middle of 2014, there has been a notable

fall in new trust financings, as policymakers tightened rules on originating such financings,

and in fact, net new trust financings (i.e. new issuance less maturing amounts) have

hovered around zero for the past twelve months. We believe that the bond market is a

channel that policymakers will seek to utilize to compensate for the reduction in trust

financings.

1 China Railway Corporation 15 210 Central SOE 9952 State Grid Corporation of China 9 70 Central SOE 20913 China Power Investment Corporation 20 68 Central SOE 1824 China Datang Corporation 14 67 Central SOE 1865 China Guodian Corporation 15 60 Central SOE 2136 Shenhua Group Corporation Limited 6 57 Central SOE 3257 Aluminum Corporation of China 14 52 Central SOE 2808 China Huadian Corporation 12 48 Central SOE 2129 Jiangsu CommunicationS Holding Company 19 47 Regional SOE 41

10 Shaanxi Coal and Chemical Industry Group Co.,Ltd. 15 46 Regional SOE 17711 China Southern Power Grid Co.,Ltd 9 45 Central SOE 47212 China National Building Material Company Limited 12 44 Central SOE 12413 China Shenhua Energy Company Limited 5 40 Central SOE 24814 COFCO Limited 8 39 Central SOE 25015 China Huaneng Group 11 38 Central SOE 29216 China United Network Communications Corporation Limited 5 35 Central SOE 28817 Aluminum Corporation of China Limited 12 35 Central SOE 14218 China Minmetals Corporation 12 33 Central SOE 31819 Huainan Mining (Group) Co.,Ltd. 14 33 Regional SOE 5720 Tianjin Infrastructure Construction & Investment (Group) Co.,Ltd 11 32 Regional SOE 1321 China Minmetals Corporation 11 31 Central SOE 32322 China Petroleum & Chemical Corporation 2 30 Central SOE 282623 GD Power Development Co.,Ltd. 12 29 Central SOE 6124 China Three Gorges Corporation 6 28 Central SOE 6325 Datang International Power Generation Co.,Ltd. 9 28 Central SOE 7026 China CNR Corporation Limited 13 27 Central SOE 10427 Metallurgical Corporation of China Ltd. 8 27 Central SOE 21628 Shandong Hi-Speed Group Co.,Ltd 13 26 Regional SOE 4429 Hunan Expressway Construction Development Corporation 14 23 Regional SOE 930 Huadian Power International Corporation Limited 8 23 Central SOE 6831 Huaneng Power International,Inc. 6 22 Central SOE 12532 China Communications Construction Company Limited 6 20 Central SOE 36733 Shandong Iron & Steel Group Co.,Ltd. 8 20 Regional SOE 11634 Beijing Infrastructure Investment Co.,Ltd. 8 20 Regional SOE 1135 Tianjin Binhai New Area Construction & Investment Group Co.,Ltd. 8 20 Regional SOE 736 Shaanxi Provincial Communication Construction Group 11 20 Regional SOE 937 China Telecom Corporation Limited 3 19 Central SOE 32738 Beijing State-Owned Capital Management Center 4 19 Regional SOE 66239 State Development & Investment Corporation 6 19 Central SOE 11340 Yangquan Coal Industry(Group) Co.,Ltd 14 19 Regional SOE 18141 China Yangtze Power Co., Ltd. 6 18 Central SOE 2742 Guangzhou Metro Corporation 7 18 Regional SOE 743 Hubei Provincial Communications Investment Co., Ltd. 8 18 Regional SOE 1344 Jiangxi Provincial Expressway Investment Group Co.,Ltd 16 18 Regional SOE 1145 Gansu Provincial Highway Aviation Tourism Investment Group Co.,Ltd. 9 17 Regional SOE 2146 Henan Expressway Management Co Ltd 8 16 Regional SOE 947 Bright Food (Group) Co., Ltd. 7 16 Regional SOE 12148 China Longyuan Power Group Corporation Limited 5 16 Central SOE 1849 China Merchants Group Ltd. 5 15 Central SOE 9350 China General Nuclear Power Corporation 6 15 Central SOE 45

2014 Revenue (RMB bn)

IssuerRankNo. of 2014 bond issues

SOE Status2014 Issuance

(RMB bn)



Exhibit 36: Growth of trust assets outpaced growth of corporate bond market Data in RMB tn

Source: Wind, China Trustee Association.

0

2

4

6

8

10

12

14

16

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2010 2011 2012 2013 2014 2015

Trust assets

Corporate bond notional outstanding



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