China’s Bond Market: Growth, Innovation, and Regulatory Evolution

China’s debt capital markets, the second-largest in the world, have seen significant evolution and growth in recent years. This article explores the critical developments and emerging trends that have shaped the market during this period, providing a comprehensive overview of its dynamic landscape.

Growth in Market Size and Liquidity

China’s debt capital markets reached a historic milestone in 2024, with total outstanding debt securities reaching CNY177 trillion (a 12.1% YoY growth), reinforcing its position as the world’s second-largest bond market. Annual issuance volume surged by 11.7% YoY in 2024 and reached CNY79.3 trillion, driven by corporate refinancing needs and government fiscal stimulus. Trading liquidity also improved markedly, with daily average turnover hitting CNY1.5 trillion on the interbank bond market and CNY172 billion on the securities exchange-based market. The robust growth in market size and liquidity underscores the resilience of China’s debt capital markets and their ability to attract a diverse range of investors.

Regulators have also endeavoured to improve operational efficiency and expand the investor base of China’s debt capital markets. In February 2024, the People’s Bank of China (PBOC) published the Notice on Matters Relating to Interbank Bond Market OTC Business, easing access to the bond market by individual, corporate and institutional investors via OTC channels.

Continued Opening Up of China’s Debt Capital Markets

China’s debt capital markets have opened up to foreign investors over the past decade. Initiatives such as Bond Connect have facilitated foreign investors’ access to China’s interbank bond market through Hong Kong, simplifying the investment process and reducing entry barriers. This initiative has substantially increased foreign holdings of debt securities traded on China’s interbank bond market, contributing to market liquidity and diversification. The growing participation of foreign investors has brought additional capital and expertise to China, enhancing market stability and integration with global financial markets.

In 2024, PBOC and the Hong Kong Monetary Authority (HKMA) continued expanding connectivity between the mainland and Hong Kong markets. In January 2024, PBOC and HKMA entered into the Memorandum of Understanding between the People’s Bank of China and Hong Kong Monetary Authority on Strengthening Supervisory Cooperation under Bond Connect, further deepening the cooperation between PBOC and HKMA under the Bond Connect regime. The new initiatives under this memorandum include:

• extending the settlement time under the Central Securities Depositories (CSDs) linkage;
• supporting the settlement of multi-currency debt securities in Chinese yuan, Hong Kong dollar, US dollar and euro through the CSDs linkage; and
• expanding the scope of eligible Mainland investors in due course.

On the same day, HKMA announced its support for the development of offshore Chinese yuan repo business using Northbound Bond Connect bonds as collateral to facilitate the establishment of market-based arrangements for offshore Chinese yuan liquidity management and enhance Hong Kong’s competitiveness as an offshore Chinese yuan business hub.

In May 2024, the PBOC launched the Swap Connect regime, covering a wider range of swap products to further align with the international derivatives markets. This new regime is also intended to streamline the procedures for international investors, aiming to reduce the operational costs for both domestic and international investors. In July 2024, PBOC announced that it would permit foreign investors investing in China’s domestic debt capital markets to use their Northbound Bond Connect bonds to meet margin requirements for transactions under the Swap Connect regime. This integration is expected to streamline cross-border derivatives trading and reduce operational costs for international investors, further linking onshore and offshore risk management tools. In December 2024, PBOC launched the OTC bond connect programme with the United Kingdom. By the end of 2024, debt securities held by foreign investors through this OTC bond connect reached CNY4.2 trillion, representing 2.4% of the total size of China’s debt capital markets.

In addition to expanding the Bond Connect and Swap Connect regimes, China’s debt capital markets have continued attracting international investors and issuers. In March 2024, the State Council published the Action Plan to Firmly Execute High-quality Opening-up and Further Attract and Utilize Foreign Investment. This Action Plan calls for further streamlining the procedures for foreign financial institutions to access China’s domestic bond market and the faithful implementation of favourable tax treatments for foreign investors investing in China’s domestic bond market. 2024 also saw significant growth in the panda bond market, allowing foreign issuers to raise funds in China and fostering greater financial integration. See “Surge in the Panda Bond Market” below for details.

The introduction of more flexible trading mechanisms and the relaxation of restrictions on foreign investment have facilitated international investors’ investment in China’s domestic debt capital markets. The growing presence of foreign investors and issuers has also encouraged adopting international best practices and standards, further aligning China’s domestic debt capital markets with the global norms.

Surge in the Panda Bond Market

Panda bonds, namely Chinese yuan-denominated bonds issued by overseas issuers on China’s domestic debt capital markets, have gained popularity in 2024. In 2024, the issuance of panda bonds reached a record high, with 109 issues totalling CNY195 billion. According to the International Institute of Finance, the outstanding amount of panda bonds has now surpassed that of Samurai bonds, which are JPY bonds issued by international issuers in Japan. This development has established the panda bond market as one of the key markets for international issuers worldwide. The issuance of panda bonds has given international corporations, financial institutions, and sovereign and supranational issuers access to China’s domestic debt capital markets. This access facilitates cross-border financing and enhances global financial connectivity.

The panda bond regulators have also introduced a series of innovations to promote growth in this market. The National Association of Financial Market Institutional Investors (NAFMII) published the amended Guidelines on Debt Financing Instruments of Overseas Non-Financial Enterprises in October 2023 and the Guidelines on Bond Issuance by Foreign Governmental Agency and International Development Institution Issuers in January 2024, providing further clarity on panda bond issuances by corporate, sovereign and supra-national issuers and simplifying the documentation requirements for sovereign and supra-national issuers. In January 2025, NAFMII published the Notice on Refining the Mechanism for Green Bond Issuances by Overseas Institutions in the Interbank Bond Market, permitting international issuers to issue green panda bonds under their own green financing frameworks and aligning with the international standards on project certification, proceeds management and information disclosure.

The fast-growing panda bond market offers investors a wider range of options, contributing to China’s debt capital markets’ overall growth and product diversification.

Shift Towards Green and Sustainable Finance

In recent years, there has been a notable shift towards sustainable finance in China’s debt capital markets. These debt finance initiatives promoting renewable energy, energy efficiency and pollution control demonstrate China’s commitment to environmental protection and sustainable development. The rise in sustainable finance reflects the growing awareness and demands for environmentally responsible investments. In 2024, there were a total of 477 green bond issuances with an aggregate issue size of CNY681 billion. Sustainable development bonds supporting the transition of high-carbon industries, or “transition bonds”, gained significant popularity in 2024, with a total issuance size of CNY65 billion, a 53.6% increase from 2023. These transition bonds include both sustainable development bonds funding specific low-carbon transition projects and sustainability-linked bonds setting low-carbon transition targets for issuers.

Both government and corporate initiatives are actively promoting sustainable finance practices. This focus on environmental sustainability aligns with China’s broader goals of reducing carbon emissions and promoting green finance. The Chinese government has introduced policies to encourage green financing and set guidelines for the issuance of green, sustainable development and sustainability-linked bonds. In April 2024, PBOC, the National Development and Reform Commission (NDRC), the Ministry of Finance (MOF), the Ministry of Ecology and Environment, the National Financial Regulatory Administration and the China Securities Regulatory Commission (CSRC) jointly published the Guidance Opinion on Further Enhancing Financial Support to Green and Low-carbon Development, outlining the roadmap for the development of green and sustainable financing in China. The Guidance Opinion aims to establish a world-leading financial support regime for green and low-carbon development and a series of standards and policies on such financial support. In October 2024, NAFMII published the Notice on Further Improving Mechanisms Relating to Green and Transition Bonds, introducing improved issuance and disclosure practices for green and transition bonds.

Corporations have also increasingly adopted sustainable finance practices, seeking to raise funding through green, sustainable development, and sustainability-linked bonds. These developments are driving the growth of the sustainable finance market and contributing to efforts to achieve environmental and social goals.

Increased Market Integration

Traditionally, China’s debt capital markets are divided into two separate markets, the interbank bond market and the exchange market, with different supervision standards and authorities.

Regulators have endeavoured to align the two markets and unify the regulatory standards and authority, including the establishment of connectivity between the two markets. In December 2020, the three primary regulators of China’s corporate debt securities markets – PBOC, NDRC and CSRC – jointly released the Administrative Measures on Information Disclosure for Corporate Credit Bonds, establishing the unified disclosure standards for corporate issuers across different markets. In April 2024, NAFMII (the self-regulatory body for corporate debt securities on the interbank bond market) and the Securities Association of China (the self-regulatory body for the exchange market) jointly published the Measures on the Market-based Assessment of Credit Rating Institutions on Bond Markets, establishing a joint assessment and rating mechanism administered by NAFMII and the Securities Association of China. This is the first joint regulatory regime by self-regulatory authorities from the two markets.

In April 2024, the State Council published the Opinions on Promoting the High-quality Development of Capital Markets by Enhancing Regulation and Preventing Risks, announcing the plan to accelerate the formulation of unified regulation of corporate bonds.

Strengthened Supervision of Local Government Bonds

Local government bonds have also increased significantly in China’s debt capital markets. In 2024, the total issuance of local government bonds totalled CNY7.7 trillion. Recent policy initiatives have encouraged local governments to issue bonds to finance infrastructure projects, supporting regional development and diversifying China’s debt capital markets. This has expanded product offerings to investors and allowed Chinese local governments to raise funds to invest in infrastructure, local economic growth and social development, as well as to refinance existing debt. The increase in municipal bond issuances has helped finance and support essential public infrastructure projects, such as transportation, water supply, and urban development, driving economic growth and improving the quality of people’s lives in various regions.

In December 2024, the State Council published the Opinion on Improving Management Mechanisms on Special Local Government Bonds. The Opinion further expanded the scope of permitted use of proceeds raised from special local government bonds, including investing in innovative sectors such as new materials, digital economy and biotechnology. The Opinion also delegates to certain local governments (including ten provincial-level governments and the government of Xiong’an New District, a national-level development zone) the discretion to determine their own debt issuance as a pilot programme. Under the pilot programme, these local governments may approve the local government debt issuance by government agencies within their own jurisdictions without requiring national-level approval from NDRC and MOF.

Growth in the municipal bond market is also accompanied by the implementation of enhanced risk control with respect to LGFVs (local government financing vehicles). The Chinese government has imposed tight restrictions against local governments using LGFVs to raise debt outside the fiscal budget and has introduced a “debt swap” programme to replace LGFV debt with direct debt financing by local governments. These measures aim to reduce financial risks and enhance market stability. In 2024, the total size of local government bonds used for such debt swap programme reached CNY3.1 trillion, representing approximately 40% of the total local government bond issuance in 2024. The tightening regulation of LGFVs aims to mitigate the risks associated with the “hidden debt” of local governments and improve their overall financial health.

Financing Support to Technology and Innovation

Technology and innovation have been a popular topic in China’s capital markets for years.

In April 2024, the Ministry of Commerce and nine other regulatory authorities jointly published the Policy Measures to Further Support Investment in Domestic Science and Technology Enterprises by Foreign Institutions. The Policy Measures provide that the regulators will support the issuance of onshore Chinese yuan bonds by eligible foreign institutions to finance their investment in science and technology. In addition, it encourages bond issuances by foreign-invested companies in the science and technology sectors.

In March 2025, the Governor of PBOC announced plans to establish a “technology and innovation” segment of China’s debt capital markets, which will be accessible to financial institutions, technology enterprises, and private equity investors. This new segment is expected to expand innovative technology industries’ access to China’s debt capital markets, further encourage technology innovations, and promote industry upgrades.

Conclusion

China’s debt capital markets have seen significant changes in recent years, marked by the growth in size and liquidity, increased international participation, regulatory reforms, and a shift towards sustainable finance and financing support for technology. These developments have contributed to the growth and diversification of the market, making it a more attractive and dynamic environment for investors and issuers alike. The substantial potential for further market expansion and the ongoing efforts to introduce new products are expected to bring significant opportunities to investors.

The resilience and growth potential of China’s debt capital markets, as well as China’s commitment to sustainable finance and open-up efforts, are expected to bring further changes in these markets, offering diverse opportunities for increasing market participants.