Understanding China’s Bond Market

Understanding China’s Bond Market

Understanding China’s Bond Market

The bond market of the Shanghai Stock Exchange (SSE) maintains a rapid growth these years, through the integration of all aspects of resources and intensified marketing efforts. The number of bonds listed, the amount of debt outstanding and the transaction volume have achieved significant breakthroughs.

As of 31th, Dec., 2012, the number of bonds listed has reached 1021, an increase of 389 from 2011 by 62%. Among them, there are 147 government bonds, 44 local government bonds, 740 corporate bonds, 16 convertible bonds, 14 bonds with detachable warrant, 44 SME private debts, and 16 others including ABS. The nominal value of bonds outstanding has reached CNY 1.06 trillion, which represents a CNY 0.33 trillion increase from that of last year, with a 45% growth. The transaction volume also showed a sharp increase in 2012, which has reached CNY 38 trillion, 17 trillion more than that of 2011’s total. Related charts as follows:

The number of bonds listed at the end of 2012 (Chart 1)

The Amount of Cash Bond Transaction from 1991 to 2012(Chart 2)

The Amount of Collateral Repo from 1991 to 2012(Chart 3)


1.Trading Mechanism: offer both public quote and inquiry mechanisms, as well as anonymous auto-matching mechanism, to meet the needs of all types of investors

2.Regulatory Advantages: standard bond disclosure rules are established, in accordance with the requirements of the Listing Rules of Corporate Bonds, to regulate the issuers, as well as to protect the investors

3.Various Investors: including both institutional investors and individual investors, and to provide sound liquidity

4.Synergy with the Stock Market: a securities account can trade both shares and bonds, which can take advantage of different features of share and bond market to improve asset allocation and risk management

5.Repo System: the repo system in SSE bond market is a standardized third-party repo system, which can automatically match buyers and sellers, to greatly reduce the financing costs

6.Products: Collateral repo, the SME private debts, and asset backed securities have already been launched in the market, and when-issue trading and protocol repo etc. are about to be launched.

7.Straight through Processing System: The investors’ main responsibility is to place an order and to ensure enough bonds and funds available before settlement. Once the transaction is made, the relevant clearing, settlement and report are done automatically by the system, without manual intervention.

8.Central Counter Party: Once bond transactions are made, the China Securities Depository and Clearing Corporation will provide central guarantee settlement service, which avoids the counterparty risk.

9.Netting Settlement System: The funds withdrawn by selling the bonds can be used to buy bonds on the same day. This greatly improves the liquidity and lowers the transaction costs.

10.Cost Saving: Bond issuing, listing and repo are currently exempt from transaction fees on the SSE.


1.Government Bond: issued and committed by the central government to raise fund, and to repay the principal and pay the interest during a certain period of time.

2.Local government bond: a kind of circulated book-entry bonds approved by the State Council, and issued by the provinces, autonomous regions, municipalities and the municipal government in 2009. Ministry of Finance is agented to issue and repay the bond.

3.Enterprise Bond: issued by the company and approved by the NDRC (National Development and Reform Commission), and the principal is redeemed and the interest is paid by the issuer.

4.Convertible Bond: issued in accordance with legal procedures, which can be converted into shares of the issuer within a certain period of time.

5.Corporate Bond: issued by listed companies and approved by the CSRC (China Securities Regulatory Commission) with a termthe duration of 1 year or above, and the principal is redeemed and the interest is paid by the issuer.

6.Bond with Detachable Warrant: a kind of convertible bonds, issued by listed companies, and the stock options and bonds can be traded separately.

7.Asset-backed Securities: the interest and principal payments are backed by the cash flows from a portfolio of other assets.

8.SME Private Debt: issued by the small & medium-sized and micro enterprises in the domestic market in private placement, the duration of the bonds is 1 year or above.

Trading System

1.Cross-matching System: It is an order-driven trading platform, on which buy and sell orders are matched on a“Price-Priority”and “Time Priority”basis.

2.Block Trading System: It is a quote-driven trading platform, on which buyers and sellers send the trade orders after negotiating and confirming the key elements of a trade outside the Exchange. The system then confirms the order and completes the clearance and settlement.

3.Fixed-income Electronic Trading Platform: Launched in 2007, the platform was designed for fixed-income trading. It provides a wholesale trading platform with higher efficiency and lower cost for fixed-income products such as Treasury and corporate bonds.

4.Cross-System Transactions
Bonds listed on the above 3 systems can achieve cross-system trading on a T+0 basis.
Bonds bought in from the fixed-income electronic trading platform can be sold on the Cross-matching system on the same day.
Bonds can be used as collateral in repo transaction on the same day they are bought in from the fixed-income electronic trading platform. In addition, bonds can be sold out on the same day after selling in repo transaction.
The fixed-income electronic trading platform currently does not accept collateral transactions.

Trading Rules

1.Cash Bond transaction on Cross-matching trading system

Type of order: limit order

Trading Unit: a block lot equals to CNY 1000

Pricing Unit: price of the bond with a face value of CNY 100

Minimum Change in Order Price: CNY 0.01Reported Amount: integral multiple of 1 block lot; not exceeding 10,000 block lots

Price Limit of Call Auction: The order price ranges from 70% and 150% of previous closing.

Price limit of Continuous Auction: Order price cannot be higher than 110% of the lowest current selling price and lower than 90% of the highest current buying price.Meanwhile order price should range from 70% and 130% of the average price of highest and lowest order price.

2.Cash Bond Transaction on Fixed-Income Electronic Trading Platform
The spot transaction should be declared in a net price. The minimum change unit of order price is CNY 0.001.

Price limit of spot transaction is 10%. The formula to calculate the price limit: the reference price of the previous day *(1±10%); The reference price of the previous day is the weighted average price of the entire transaction price, if any.

The order is submitted on 1000 block lots basis.

3.Collateral repo trading
The trading period is calculated based on calendar days. If the maturity day is a non-trading day, it will be postponed to the next trading day.

Corporate bond qualified for collateral repo agreement: The SSE will state whether a corporate bond can be used as collateral in repo transaction in its listing announcement.

Standard Bond Conversion Rate: The standard bond conversion rate is calculated and announced according to the Standard Bond Conversion Rate Management Rules.

Bonds can enter into a collateral repo agreement on the same day they are bought in from the Cross-matching trading platform. In addition, bonds can be sold out on the same day they are withdrawn from a collateral repo agreement.

Bonds can also enter into a collateral repo agreement on the same day they are bought from the fixed-income electronic trading platform. In addition, bonds can be sold out on the same day at maturity in repo transaction.

Information Disclosure Rules

1.Bond issuer should submit periodic disclosure report to SSE and disclose on the SSE website during the specified date as the Securities Act Law of The People’s Republic of China stipulated.

2.Bond issuer should submit and disclose interim report on a timely basis on the SSE website as required.

3.Bond issuer should make agreement with rating agencies on credit-update issues. Credit updating should be conducted at least once a year and related report should be disclosed timely.

4.The bond trustee should report to the SSE at first priority on the following issues: in face of potential default of the issuer which requires the issuer to provide more warranties; the bond issuer should assist trustee in fulfilling responsibility of reporting and announcement.


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Shayne Heffernan Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.