1、Overview of Chinas macroeconomy and the interbank marketPart I8Reform and Development of Chinas Bond Market(2024)Chinas financial market is among the largest in the world.Now it is increasing efforts to address the areas for further development.In the third quarter of 2023,the total assets of Chinas

2、 financial industry exceeded RMB 450 trillion,including RMB 409.8 trillion in the banking sector,RMB 13.5 trillion in the securities sector and RMB 29.6 trillion in the insurance sector.Chinas banking industry is the largest in the world,with five commercial banks listed as global systemically impor

3、tant financial institutions(GSIFIs).Chinas capital markets have witnessed rapid development.At the end of 2023,the size of Chinas bond market exceeded RMB 155 trillion,and the total market value of the stock market was close to RMB 80 trillion,making it the second largest bond and stock market in th

4、e world.Chinas financial market is also becoming increasingly recognized and attractive.A-shares and PRC government bonds have been included in global mainstream indices such as MSCI,FTSE Russell,Bloomberg Barclays and JPMorgan.Despite the favorable conditions,China faces long-term challenges such a

5、s the aging population,the difficulty in the transformation to a low-carbon economy,the wide income gap,the inefficiency of certain economic sectors and the accumulation of financial risks in some areas.China commits to the new development philosophy which is innovative,coordinated,green,open and sh

6、ared development,and aims to effectively solve the problems of imbalance and inadequacy,prevent and resolve systemic risks,and promote high-quality economic development.Overview of Chinas macroeconomy and the interbank market9Figure 1-3:Composition of Chinas Bond Market1.2 Chinas booming interbank b

7、ond marketWith the reform of Chinas economic system,Chinas interbank market,the OTC market for institutional investors,has been established and developed rapidly.Over the past 30 years,the interbank market has become a comprehensive OTC market consisting of bond market,interbank lending market,forei

8、gn exchange market,bill market,gold market and financial derivatives market.The product mix and participant structure of each sub-market are becoming increasingly diversified,and the market size is expanding gradually.The interbank market has played an important role in macro-economic control,financ

9、ial reform and economic development.Chinas bond market displays the typical characteristics of an emerging+transition.It was developed from an ascent financial ecology,with deepening reform running through its development process.In 1997,China established the interbank bond market(CIBM)for instituti

10、onal investors.After more than two decades of development,the market has seen a steady growth in its size and performed increasingly strong financing functions.The market participant types and bond product offerings have been continuously expanded.The financial infrastructure has been strengthened.T

11、he healthy competition between the interbank market and the exchange market has promoted the rapid development of the debt capital markets of China.Chinas bond marketInter-bank marketOTC marketMain board for bondsMarket for institutional investorsNAFMII is the self-regulatory organizationExchange ma

12、rketBank counter marketInter-ministerial Coordination SystemChinas corporate credit bond market developed in a relatively slow pace before 2004.This market landscape has changed after the inception of NAFMII in 2007 and the introduction of the registration regime for bond offerings on an OTC market.

13、According to BIS statistics,China has ranked the second in the world in terms of the size of corporate credit bond market.Improving the operation of the bond marketPart II16Reform and Development of Chinas Bond Market(2024)2.2 Information disclosureAs the core of the registration regime,information

14、disclosure is not only an important part of investor protection,but also the foundation for preventing systemic risks.Market transparency directly affects the efficiency of market operation.The Rules on Information Disclosure of Debt Financing Instruments of NonFinancial Enterprises in the Interbank

15、 Bond Market issued by NAFMII requires issuers and other relevant parties to disclose information in a truthful,accurate,complete,timely and fair manner.The system featuring“Information Disclosure RulesForm RequirementsSample Disclosure”for the DFI market has been established.NAFMII will continue to

16、 amend and improve the disclosure rules,and urge relevant parties to fulfill their duties and improve the quality of information disclosure in the CIBM.Different from the practices on the international markets,the concept of post-issuance management obligations has been introduced to Chinas domestic

17、 bond market.Ongoing information disclosure during the life of the bonds is among the most important post-issuance obligations to strengthen the protection of investorsrights and interests.20Reform and Development of Chinas Bond Market(2024)2.4 Investor protection toolkitThe investor protection mech

18、anism for DFIs has been strengthened on a continuous basis,now covering the entire process of registration,issuance and post-issuance of bonds.Firstly,investor protection covenants can be included in the prospectus to deter the issuers bad conduct,and at the same time,facilitate the resolution proce

19、ss upon the occurrence of a default.Secondly,the collective action mechanism,such as meeting of bondholders,trustee and consent solicitation,has been developed to provide investors with tools for orderly resolution of risks through collective actions.Thirdly,involved parties are encouraged to adopt

20、diversified measures to mitigate risks and protect the legitimate rights and interests of all parties to the greatest extent.CIBM offers a wide range of products covering all major bond types in international markets,ranging from government bonds to corporate credit bonds,from credit-backed bonds to

21、 asset-backed securities,from short-term bonds to long-term bonds,and from general-purpose bonds to GSS bonds,catering to the diverse financing and investment needs of issuers and investors.Expanding bond product offerings Part III24Reform and Development of Chinas Bond Market(2024)The segment of DF

22、Is regulated by NAFMII consists of a broad spectrum of bonds with the framework of“basic products plus specialized products plus derivatives”.Basic products are divided into eight items under three categories,namely,corporate credit bonds,structured products and SSA bonds;specialized products are di

23、vided into 26 items under three categories by use of proceeds,specific issuing entities and special bond terms or transaction structures;and derivatives include four types of credit risk mitigation instruments.3.1 A broad spectrum of bond products in the CIBMDebt securities in the CIBM can be divide

24、d into three major categories by issuer type:government bonds,financial institution bonds,and corporate credit bonds.Government bonds include PRC government bonds and local government bonds;financial institution bonds consist of bonds issued by policy banks,commercial banks and non-bank financial in

25、stitutions,but mainly issued by commercial banks;and corporate credit bonds are composed of non-financial enterprise DFIs and bonds issued by listed companies(enterprises).Corporate credit bondsGov.bondsFinancial institution bondsNAFMII DFIs 9%Enterprise bonds 1%Listed company bonds 9%ABS of financi

26、al institutions 1%Certificates of deposit 10%Financial Bonds 24%PRC government bonds 19%PBC notes 0%Local Government Bonds 26%Government sponsored agency bonds 1%International agency bonds 0%Figure 3-1:Bond product mix in the CIBM(by outstanding volume as of the end of 2023)Source:Wind28Reform and D

27、evelopment of Chinas Bond Market(2024)Improving the system of green bond standardsThe China Green Bond Principles in line with international standards have been formulated by the China Green Bond Standard Committee(CGBSC),led by NAFMII.Four core components are established,namely,the use of proceeds,

28、project evaluation and selection,management of proceeds,and information disclosure,specifying that the proceeds shall be 100 percent used for green projects.China and the European Union(EU)jointly took the lead in completing the Common Ground Taxonomy Table(updated in June 2022).The Table,jointly re

29、cognized by China and the EU,covers a total of 72 economic activities that make significant contributions to climate change mitigation in six major fields,including energy,manufacturing,construction,transportation,solid waste and forestry.Institutions from China or EU may apply the Table to their is

30、suance of green bonds,labeling outstanding bonds and green financial products,or apply the Table to third-party markets such as those in“Belt and Road”countries.On-going information disclosure in connection with green bonds has been enhanced.In November 2023,NAFMII led the CGBSC to release the Guide

31、lines on Post-issuance Information Disclosure of Green Bond,which contains a template for post-issuance information disclosure,displaying use of proceeds in a structured manner,and clarifying the measurement standards and disclosure requirements of environmental benefits.The professionalism,independ

32、ence and market reputation of verification and certification providers for green bond have been promoted.CGBSC carried out a market-oriented evaluation for verification and certification providers and released a list of 18 institutions that completed the registration process,ensuring the quality of

33、green bond certifications.CGBSC has also implemented differentiated management on verification and certification providers with different rankings,established incentive and accountability mechanisms,and standardized business origination and review process.CGBSC conducts regular cross-checks,requires

34、 verification and certification providers to submit self-inspection reports and assume corresponding responsibilities.These measures will help the market better identify green activities,and guide the funds to flow into green areas more precisely.Providing diversified risk hedging instrumentsPart IV

35、By providing a wide range of financial instruments(including financial derivatives,bond repos and bond lending,etc.),the interbank market facilitates market participants to hedge risks to cater to their business needs,boosts trading activities and promotes price discovery.34Reform and Development of

36、 Chinas Bond Market(2024)4.1 Financial derivatives markets and derivatives master agreementsChinas interbank derivatives market has witnessed rapid growth in recent years.A spectrum of comprehensive and actively traded derivatives products have been developed.In 2023,the trading volume on the interb

37、ank derivatives market was around RMB 196.7 trillion,of which interest rate derivatives(IRDs),foreign exchange derivatives(FXDs)and credit derivatives(CDs)contributed RMB 32 trillion,RMB164.7 trillion and RMB 65.8 billion,respectively.IRDs include government bond futures,interest rate swaps(IRS),for

38、ward rate agreements(FRAs),bond forwards,standard bond forwards and interest rate options.IRS is the most active IRD and interest rate hedging instrument.As of the end of 2023,the market size reached RMB32 trillion.Maturities range from one year to ten years.Short-term(one year and less)are very act

39、ive.Products include FR007,Shibor3M,Shibor O/N,LPR1Y and LPR5Y,with FR007 the most active.FXDs include RMB/FX Forward,RMB/FX Swap,RMB/FX Cross Currency Swap,RMB/FX Option and foreign currency pair derivatives trading.Trading modes include bidding,bilateral inquiry and match making.The Renminbi can b

40、e traded against currencies such as the US dollar,Euro and British pound,etc.As of the end of 2023,the market size reached US$23 trillion(equivalent to approximately RMB164.8 trillion).Credit Derivatives comprise two types of products:one-on-one contract products,which cannot be traded in the second

41、ary market,and one-to-many warrant products,which can be traded in the secondary market.Different products have been provided,such as credit risk mitigation agreements(CRMA),credit default swap index(CDS/CDX),credit risk mitigation warrants(CRMW),and credit-linked notes(CLN).NAFMII has introduced an

42、 innovative way of bond financing supported by CRMW since 2018.The credit protection seller offers a corresponding CRMW at the time of bond issuance.Bond investors can then subscribe to the CRMW on demand,which supports corporate bond financing and meets the bond investors demand for risk hedging.In

43、 2023,317 credit derivatives trades were concluded with a notional amount of RMB 65.8 billion.NAFMII has issued a number of standard derivative contracts to promote the standardization of derivatives trading and facilitate the steady and efficient development of the derivatives market.Such documenta

44、tion includes master agreements of financial derivatives and related performance assurance documents,documents covering trading terms of various types of derivatives,and other documents formulated in line with the reform trends with respect to benchmark interest rates and the development of the cred

45、it derivatives market.Providing diversified risk hedging instruments374.2 Repo market and repo master agreementsThe repo market is a crucial component of the financial market and a significant source of financing for financial institutions.The interbank market offers two types of repos:pledged repos

46、 and title transfer repos.Pledged repos are more prevalent in the domestic market compared to the international market.In 2023,the turnover of the interbank money market reached RMB1817 trillion,representing a 19.0%YoY increase;pledge repo transactions amounted to RMB 1669 trillion,a 21.4%increase Y

47、oY;title transfer repo transactions totaled RMB5.4 trillion,a 2.7%decrease YoY.In 2013,NAFMII released the Master Agreement for Bond Repurchase in Chinas Interbank Market(2013)to enhance the efficiency of repo transactions,reduce legal costs,and mitigate market risks.Over 60,000 agreements have been

48、 executed by more than 3,000 financial institutions and asset management product managers.4.3 Bond lending market and lending master agreementsBond lending is a financing activity where the borrower borrows underlying bonds from the lender with a specified amount of collateral.The borrower agrees to

49、 return the bonds at a future date in exchange for the collateral provided.In February 2022,the Peoples Bank of China(PBC)issued the Measures for the Administration of Bond Lending in the Interbank Bond Market to improve the regulation of bond lending,including on market participants,collaterals and

50、 master agreements,to enhance the efficiency and accessibility of bond lending.In June 2022,the NAFMII Master Agreement(2022 version)was released,which offers a standard document and the method for multilateral execution.This has greatly facilitated the participation of market institutions,particula

51、rly small and medium-sized institutions,and promoted the diversification of investors from commercial banks and securities companies to rural credit cooperatives,unincorporated products,and finance companies.The bond lending market has rapidly developed thanks to the continuous improvement in the re

52、gulatory regimes and the introduction of master agreements.In 2022,the markets transaction volume increased to RMB 16.1 trillion,which is about 1.5 times higher than the previous year.NAFMII has established a self-regulation framework with a variety of regulatory measures,including day-to-day monito

53、ring,on-site and off-site inspections,market evaluation,dispute resolution,self-regulatory investigation and penalties.On the daily basis,NAFMII guides market participants to comply with self-regulatory rules through using a combination of conducting inspections,convening meetings with market partic

54、ipants on their regulatory breaches and administering market-based evaluations.To remediate violations by market participants,a set of regulatory actions has been established.For minor violations,self-disciplinary measures will be applied to raise the market participants attention.Serious violations

55、 will be escalated to a self-disciplinary meeting where a decision on the appropriate penalties will be rendered.If a violation is suspected to be a breach of laws and regulations,relevant information and clues will be submitted to the competent regulatory authorities after NAFMIIs decision on self-

56、disciplinary penalties.Any suspected criminal offences shall be transmitted to the public security bureau.Strengthening self-regulationPart V40Reform and Development of Chinas Bond Market(2024)5.1 Routine supervision and inspections5.2 Market-based evaluation of intermediariesNAFMII regulates the di

57、sclosure of information and the performance of duties by intermediaries through conducting ad hoc special checks and inspections on issuers and intermediaries.In 2023,NAFMII conducted special inspections on post-NAFMII conducts market-based evaluations of intermediaries to guide them towards issuanc

58、e performance of duties under 1,888 DFIs involving392 entities in total.Additionally,NAFMII conducts regular on-site inspections on brokers and market makers to ensure compliance and mitigate potential risks at an early pliance with law,professionalism and fair competition.5.3 Self-disciplinary inve

59、stigationsSelf-disciplinary investigations involve formulating rules,accepting complaints,registering case clues and complaints,filing a case,and conducting an investigation.In the primary market,investigations primarily target frauds in offerings,illegal interference with bond offerings,violations

60、of rules on financial information disclosure and non-compliance in use of proceeds.investigations.In the secondary market,investigations primarily target improper transfer of benefits,market manipulation,insider trading and failure to comply with KYC regulations.NAFMII has integrated market data,sup

61、plemented by intelligent data mining and model analysis in self-disciplinary investigations.This enables efficient detection of suspicious trading and collection of evidence,resulting in continuous improvement in the accuracy,timeliness and effectiveness of 42Reform and Development of Chinas Bond Ma

62、rket(2024)NAFMII may impose reputation penalties(Table 5-2)in conjunction with behavior penalties such as demanding rectifications,suspension of business,cancellation of NAFMII membership,and labeling inappropriate persons based on the severity of a violation.By the end of 2023,NAFMII had imposed ov

63、er 1,200 self-disciplinary penalties against perpetrators for their misconduct in bond underwriting,offering and trading activities.In recent years,NAFMII has placed greater emphasis on punishments against illegal trading activities.Figure 5-1:Expert members of the Self-disciplinary Committee of NAF

64、MIIInvestors 28Lawyers 25Infrastructure and others 7Accountants 18Lead underwriters 32Brokers 5Dealers 24Regulatory authorities 1Rating companies 7Issuers 115.4 Self-disciplinary penaltiesThe decision to impose a self-disciplinary penalty is made by a professional committee consisting of market expe

65、rts.This process demonstrates that market issues are discussed and resolved by market participants.As of the end of 2023,the self-disciplinary committee had over 150 experts.Remaining committed to opening up and development,China prioritizes its efforts to“promote high-level opening-up in the financ

66、ial sector”and“facilitate cross-border investment and financing to attract more foreign financial institutions and long-term capital to invest and operate in China.”In recent years,steady progress has been made in the opening-up of the CIBM,creating a favorable institutional environment for overseas

67、 institutions including overseas issuers,investors and intermediaries.Opening up of the bond marketPart VI54Reform and Development of Chinas Bond Market(2024)May 2022the Executive Board of the International Monetary Fund(IMF)completed the quinquennial review of the method of valuation of the basket

68、of currencies that make up the Special Drawing Right(SDR),lifting the weight of RMB from 10.92 percent to 12.28 percent,further promoting the internalization of RMB.May 2022the PBC,the China Securities Regulatory Commission(CSRC)and the State Administration of Foreign Exchange(SAFE)jointly issued an

69、 announcement to open up the interbank bond market and the exchange bond market in a coordinated and synchronized way in accordance with the principle of“one set of rules for an integrated bond market”.Under the existing rules,overseas investors have been provided easy access to Chinas bond market a

70、nd the requirements with respect to cross-border fund flows have been aligned across the CIBM and the exchange market.July 2022the China Green Bond Standard Committee(CGBSC)chaired by NAFMII released Chinas Green Bond Principles.As an important step towards the high-quality development of Chinas gre

71、en bond market,it marks the establishment of domestic harmonized green bond standards in line with international standards,demonstrating the countrys confidence and actions to boost the high-quality development of its green bond market.November 2022the PBC together with the SAFE issued the Provision

72、s on the Management of Funds Invested by Overseas Institutional Investors in Chinas Bond Market,optimizing and specifying the requirements on management of fund flows in connection with investments by overseas institutional investors in Chinas bond market.ChronicleJanuary 2023the Notice by the Peopl

73、es Bank of China and the State Administration of Foreign Exchange on Matters Concerning the Administration of Funds of Overseas Institutions Raised from Bonds Issuance in China was promulgated.It was intended to refine the rules regulating panda bond proceeds and related funds to facilitate debt financing by overseas institutions in Chinas bond market.