Foundation and Exploration: The Reform Logic and Innovation Direction of China's Bond Market | Capital Markets

By/ Yan Hong, Vice Dean of Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University; Director of the China Securities Investment Research Center

China’s bond market plays a critical role in serving the real economy and implementing national strategies, but it still faces issues such as structural imbalances, an investor base that needs to be further optimized, a credit ecosystem that needs to be improved, and relatively low levels of international participation. This article reviews the achievements and challenges of market development, and proposes reform pathways across six dimensions: the reform of the registration-based system, the construction of the credit ecosystem, innovation in product supply, integration across inter-market segments, institutional-level opening-up, and modernized supervision, to provide references for promoting high-quality development of the bond market.

Introduction

As a core pillar of the direct financing system, China’s bond market is an important carrier through which financial markets serve the real economy. It carries the fundamental mission of optimizing resource allocation, empowering the transformation and upgrading of the real economy, and preventing and defusing systemic financial risks. After decades of evolution, the market has gradually moved from early, scattered experimentation toward a more standardized, large-scale development stage. With the continuously expanding market size, an increasingly well-developed infrastructure system, a constantly richer range of products, and the urgent demand from the real economy for diversified financing via capital markets, it has firmly secured its position as the world’s second-largest bond market and has become an indispensable component of China’s modern financial market system.

2026 is the starting year of the “15th Five-Year Plan (2026–2030)” and a key window for China’s economy to push deeper into high-quality development. The implementation of a series of major national strategies—including cultivating new quality productive forces, pursuing a green and low-carbon transition, and promoting coordinated regional development—has placed higher requirements on the bond market’s precision in serving the real economy, its product innovation capacity, and the efficiency of resource allocation. At the same time, as the process of RMB internationalization continues to deepen, the bond market also urgently needs to integrate more deeply into the global financial system through institutional-level opening-up, becoming an important target for global asset allocation. Against this backdrop, the core question and strategic opportunity for today’s bond market development is how to break institutional barriers through market-oriented reforms, absorb international best practices and high-quality resources through high-level opening-up cooperation, develop product innovation to meet real-economy needs, and upgrade the bond market from a traditional “financing channel” to a core financial infrastructure that supports national strategies, guides resource allocation, and manages macro risks. Based on the realities of China’s bond market development, and drawing on the latest policy directions, market data, and research findings, this article systematically reviews the achievements and challenges of market development, deeply analyzes the internal logic behind further深化 reforms, and puts forward targeted policy recommendations, in order to provide theoretical and practical references for China’s bond market to move toward a higher level of high-quality development.

Achievements and Challenges in the Development of China’s Bond Market

Market scale continues to expand, and structural imbalances have become prominent

Over decades of rapid development, China’s bond market scale has achieved leapfrog growth. By the end of 2025, the bond market’s custodial balance reached 196.7 trillion yuan, up 68% from the end of 2020, and the market has maintained its position as the world’s second-largest bond market for consecutive years. From the issuance side, the total bond issuance amount across the whole market in 2025 was approximately 88.5 trillion yuan. Of this, interest-rate debt issued amounted to 32.64 trillion yuan, corporate credit-type bonds were approximately 13.5 trillion yuan, financial bonds were about 8.5 trillion yuan, and negotiable certificates of deposit among banks were about 33.8 trillion yuan. The product category system continues to diversify, but there is still room for further improvement in the share of corporate credit-type bonds in total issuance.

In terms of serving the real economy, the support role of the bond market continues to be evident. By the end of 2025, the balance of local government bonds reached 54.66 trillion yuan, strongly supporting the delivery of infrastructure construction, livelihood projects, and coordinated regional development. Policy measures such as financing support tools for private enterprises and credit protection tools have been implemented with tangible results, helping private bond financing gradually recover. The promotion and upgrade of science and innovation/tech innovation bonds (Ke Chuang bonds) has provided targeted support for technological innovation, and, leveraging the characteristics of “multiple issuers, clear use of funds, and maturity matching,” has become an important vehicle for financial support to technological innovation, offering medium- to long-term funding support for the development of technology-based enterprises.

At the same time, the structural imbalance problem in the bond market remains prominent, serving as an important factor constraining high-quality market development. Looking at the issuance structure of Ke Chuang bonds, according to Far East Credit (FEDA XIN) statistics: from January 2021 to April 2025, the share of private enterprises’ Ke Chuang bond issuance was only 7.61%, while the shares of local state-owned enterprises and central state-owned enterprises were 46.66% and 42.81%, respectively. After the “technology sector” in the bond market started in May 2025, the private sector’s share only edged up slightly to 7.71%, while state-owned enterprises still accounted for nearly 90% of the share. The effectiveness of Ke Chuang bonds in serving private technology and innovation enterprises and in activating private technological innovation vitality has not been fully unleashed. From the overall corporate credit-type bond market, the imbalance in issuer structure is even more significant: in 2025, the issuance scale shares of central state-owned enterprises and local state-owned enterprises (including urban investment companies) were approximately 33% and 62%, totaling about 95%, while private enterprises accounted for only about 4.8%. Moreover, the financing costs for private enterprises were significantly higher than those for state-owned enterprises. The issues of “financing being difficult” and “financing being expensive” have not yet been fundamentally resolved. The broad inclusiveness of the market urgently needs improvement, and the ability to serve private-sector economic development still needs strengthening.

Market-oriented mechanisms are gradually improving, but the investor structure still needs optimization

On the issuance side, the full and deepening implementation of the registration-based system reform has become an important milestone in the market-oriented development of the bond market. In 2020, the registration-based system for public issuance was fully implemented for corporate bonds and enterprise bonds. In the interbank market, non-financial enterprise debt financing instruments have been managed under the registration-based system since 2008. In 2023, the China Securities Regulatory Commission issued the “Guiding Opinions on Deepening the Reform of the Bond Registration System,” further clarifying the direction and pathway for reforming the registration-based system for bonds, pushing the registration-based system to move from “formal implementation” to “substantive deepening.” By the end of 2025, the major credit bond categories had broadly achieved registration-based issuance. Issuance procedures were greatly simplified, and review efficiency was significantly improved, while issuers’ autonomy in pricing and their space for independent issuance continued to expand.

On the investment side, the bond market has formed a diversified pattern centered on institutional investors. Commercial banks, as the largest institutional investor, hold bonds accounting for 48% of the total custodial balance. Long-term funds such as insurance funds, pension funds, and social security funds continue to increase their allocation to bond holdings. With their large scale and long maturities, they have become a market stabilizer. Individual investors mainly participate indirectly through products such as bank wealth management and public funds, and their participation scale has grown steadily. However, from the perspective of fund structure, by 2025, the proportion of incremental custodial balances held by long-term funds such as insurance funds, pension funds, and social security funds was less than 25%, far below mature market levels of 50% or more. The high share of short-term funds makes the market more sensitive to interest rate fluctuations and changes in liquidity conditions, resulting in insufficient price stability and limited ability to withstand shocks. Meanwhile, the low share of long-term funds also makes it difficult for the bond market to meet the real economy’s medium- to long-term financing needs. This demand from national strategies such as technological innovation and green development does not match the market’s provision of medium- to long-term funds, which constrains the depth and breadth of the bond market’s ability to serve the real economy.

Ongoing strengthening of regulation and the credit system, but ecosystem construction still has shortcomings

In terms of the regulatory framework, the coordinated regulatory pattern of “one bank, one bureau, one commission” has essentially taken shape. After the financial regulatory institutional reform in 2023, the responsibilities of the People’s Bank of China, the National Financial Regulatory Administration, and the China Securities Regulatory Commission became further clarified: the central bank is responsible for daily regulation in the interbank market and macroprudential management. The financial regulatory administration focuses on supervising the bond investment activities of banking and insurance institutions. The China Securities Regulatory Commission coordinates regulation of exchange markets and the issuance registration of corporate bonds and enterprise bonds. The departments have clear division of labor and coordinate effectively, with efficient cross-agency linkages. Regulatory gaps and arbitrage space have been significantly compressed, and the market’s level of rule-of-law compliance continues to improve.

In terms of credit system construction, institutional and regulatory norms have been continuously refined, and the credit foundation has been progressively strengthened. In 2021, the “Measures for the Administration of Information Disclosure for Corporate Credit Bonds” were formally implemented, clarifying the disclosure responsibilities and obligations of issuers and intermediary institutions, and promoting a transition of information disclosure toward “true, accurate, complete, and timely.” In parallel, the “Notice on Promoting the Healthy Development of the Bond Credit Rating Industry” was issued to address disorderly rating practices, strengthening the independence and professionalism of rating agencies.

While regulation and the credit system have continued to improve, the current credit ecosystem still has three major shortcomings: first, insufficient credibility and public confidence in credit ratings. The phenomena of “overstated ratings” and “homogenization” still exist, and some rating agencies have not been able to fully perform risk-identification and risk-disclosure functions. As a result, rating outcomes are difficult to accurately reflect issuers’ credit risk. Second, default resolution efficiency is relatively low: procedures are complicated, timelines are long, and recovery rates are not high, which is unfavorable for protecting investors’ rights and interests and maintaining market confidence. Third, there is insufficient supply of credit risk mitigation tools, and risk-hedging channels are limited. In 2025, the scale of the first batch of Ke Chuang bond risk-sharing tools was only 1.35 billion yuan. Compared with the existing stock of Ke Chuang bonds of more than 3.4 trillion yuan, the gap is significant, making it difficult to meet market risk management needs.

Steady progress on opening up to the outside world, and urgent need to enhance international participation

In recent years, the bond market’s pace of opening up has continued to accelerate. It has achieved an important transition from “channel opening” to “rule alignment,” with the level of market openness continuing to improve. By the end of 2025, the amount of Chinese bonds held by overseas institutions reached 3.5 trillion yuan, accounting for 1.8% of the market’s total custodial balance. The Bond Connect mechanism has continued to be optimized: in 2025, the Northbound Bond Connect completed annual trading of 9.7 trillion yuan, and the Southbound Bond Connect expanded the eligible investor scope, with market activity increasing steadily.

In terms of international recognition, Chinese bonds have been fully included in three major international mainstream bond indices: Bloomberg Barclays, J.P. Morgan, and FTSE Russell. Their inclusion weights have continued to rise, making them an important target for global asset allocation. In terms of products and channels, the Panda bond market has developed on a regular basis. In 2025, overseas institutions issued 183.6 billion yuan of Panda bonds, with cumulative issuance reaching 1.2 trillion yuan. The offshore RMB bond issuance scale was approximately 870 billion yuan, up 16% year-on-year, providing important support for RMB internationalization.

Despite this, the depth of opening up of the bond market remains insufficient. The proportion of holdings of bonds by overseas institutions is far lower than in mature markets such as the United States (22%–24%) and Japan (6.4%). The potential for long-term international capital to enter the market has not yet been fully released. The core reasons include: differences between market rules and international mainstream standards, and insufficiently smooth institutional alignment for issuance, information disclosure, and default resolution; factors such as exchange-rate volatility and changes in interest rate spreads between China and the U.S. affecting foreign investors’ allocation preferences; insufficient liquidity in some sub-categories, increasing transaction and exit costs for foreign investors; and a need to improve the interconnectivity level of cross-border financial infrastructure, as convenience for cross-border trading and clearing and settlement still needs to be strengthened.

The Logic and Policy Recommendations for Deepening Reform of China’s Bond Market

Deepening reform of the registration-based system to lay a solid foundation for market-based operations

Market-based development is the core logic of bond market growth, and registration-based reform is an important tool for achieving that market orientation. It is also a key measure to unleash market vitality and improve resource allocation efficiency. At present, problems such as difficulties for private enterprises to issue bonds and distorted product pricing exist in the bond market. The root cause lies in the failure to fully play the roles of price discovery and resource allocation. The key underlying issue is insufficient effectiveness in information disclosure. Therefore, in deepening the registration-based system reform, the critical step is to build a market-oriented system “with information disclosure at its core.”

First, promote the transformation of the registration-based system from “formal compliance” to “substantively effective,” strengthening the pertinence and effectiveness of information disclosure. Further refine information disclosure requirements by industry and by product type, eliminate the homogenization and formalization of disclosure content, and strengthen issuers’ disclosure responsibilities for key information such as core risks, financial conditions, the intended use of funds, and debt-servicing capability. Clearly define joint liability for intermediary institutions such as securities firms, accounting firms, law firms, and rating agencies, and establish a long-term mechanism of “exemption for due diligence, accountability for negligence,” forcing intermediaries to enhance professional capabilities and practice quality.

Second, strengthen the力度 of penalties for violations to maintain the rule-of-law baseline of the market. With breaking rigid guarantees on timely payment and reducing administrative intervention as prerequisites, further improve the legal and regulatory framework for the bond market. Based on principles from finance and the basic logic of financial markets, clarify the penalty standards for illegal and non-compliant behaviors such as violations of information disclosure requirements, financial fraud, misrepresentations, and insider trading. Impose strict legal penalties on all types of illegal and non-compliant acts, increase civil compensation and criminal accountability, raise the cost of wrongdoing, and effectively safeguard investors’ right to know and their legitimate rights and interests. This will help build an institutional barrier to ensure the effective implementation of the registration-based system and create a fair, just, and open market environment.

Third, improve the benchmark system for risk-free yield to strengthen the foundation for interest rate market-oriented reform. The government bond yield curve is the risk-free pricing benchmark for the bond market and plays an important guiding role in the pricing across the entire financial market. While the tax-exempt policy on interest from government bonds improves the market attractiveness of government bonds to some extent, it has also caused a tax-based segmentation of bond pricing, weakening the benchmark function of the government bond yield curve and leading to a government bond turnover rate that is less than half that of policy bank financial bonds. In August 2025, the Ministry of Finance and the State Taxation Administration resumed the collection of value-added tax on interest income from newly issued government bonds, local government bonds, and financial bonds, which is an important breakthrough in tax system reform. In the future, efforts should continue to promote unified tax treatment in the bond market, gradually optimize tax policies for government bonds, improve government bond turnover rates and liquidity, and enhance the continuity and smoothness of the government bond yield curve, so as to fully leverage the government bond yield curve’s role as a pricing benchmark.

Improve the credit ecosystem and lay a solid foundation for healthy market development

The credit ecosystem is the “lifeline” of the bond market and the core foundation for healthy, stable, and sustainable bond market development. Targeting the major shortcomings currently faced by the bond market—such as insufficient credibility of credit ratings, low efficiency in default resolution, and the obvious financing constraints on private enterprises—systemic reforms should be used to build a virtuous credit cycle, improving the market’s credit pricing ability and risk prevention and control level…

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Source | 《Tsinghua Financial Review》 March 2026 issue, No. 148 in total

Editor | Wang Mao

Review | Qin Ting

Responsible editor | Lan Yinfan