Building debt capital markets in China

Principal Investigators
Ron Anderson, Department of Finance and Systemic Risk Centre, London School of Economics, UK.
Xuebin Chen, Institute for Financial Studies, Fudan University, China.

China Team (Fudan University)

Xianglin Jiang, Institute for Financial Studies
Qing Yang, Institute for Financial Studies
Zongxin Zhang, Institute for Financial Studies
Lijian Sun, World Economy Institution

Co-investigators UK Team (London School of Economics)
Shengxing Zhang, Department of Economics
Surojit Ghosh, Systemic Risk Centre
Chenggang Xu, Systemic Risk Centre

Building debt capital markets in China


Since 1978, the start of the transformation of the People's Bank of China into a central bank and four major state-owned commercial banks, China has pursued a major development of new financial institutions. In this China has pursued its own particular vision of when and where to integrate market elements into its economy. Elsewhere, during the 1970's and 1980's many countries around the world pursued a policy of financial development whose cornerstone was the liberalization and modernisation of the sovereign debt market accompanied to varying degrees of disintermediation through the development of corporate and sub-sovereign (i.e., "muni") bond markets. To date China has not gone very far down this path. However, increased opening of the economy, the internationalization of its currency and its accession to the SDR are all creating pressures to transform the bond market to conform to the global norm established by the US, Europe and Japan. Furthermore its commitment to major infrastructure investments internationally through the Belt and Road Initiative will create even greater pressure to transform China's fixed income market for the next 4 to 5 years. Our project will examine the relevance and suitability these elements of market based finance to China's economic development strategy over the next ten years.

Our aim is to produce original theoretical and empirical, policy-oriented research on the growth of debt markets in China since 2008 and on its future development over the next 5 years. We intend for this project to become a major reference for other researchers and therefore building block for further research. Furthermore, our research will help to provide answers to pressing questions being asked by Chinese policy makers, business practitioners and the public generally.

  • Our studies of dynamics of the sovereign debt market will shed light on whether interest rates across the term structure reflect an efficient flow of credit to high return investments which support robust long-term economic growth. Furthermore, as the bond market is opened to international capital flows are the authorities adapting tools of monetary control to help keep the economy on a stable growth path?
  • Our work with corporate bonds will reveal the extent to which the market is integrated across a wide spectrum of issuers so that borrowers in different segments but with the same risk and return prospects face the same cost of capital, i.e., is finance flowing to the most promising projects. Our studies of corporate bond liquidity will show how effective the market is a reconciling the needs of borrowers for stable long-term funding with needs of savers for flexibility withdraw from the market when they need or want.
  • Our studies of the sub-sovereign debt market will show whether financial discipline is being brought to the major investment projects supported by regional and local governments. This is crucial to understanding whether recurrent issues of non-performing loans are being brought under control. And in China this is directly relevant to questions of provision of better housing and public services in the areas where they benefit society most.

To achieve these objectives we have set a small number of operational objectives for the project:

  • We will assemble a core team of academics in the UK and China to carry out a series of related research projects on Chinese debt capital markets.
We will promote the adaptation of advanced methodologies used in analysing mature debt markets to the Chinese context by facilitating international awareness of important institutional features of the Chinese financial system.
We will assemble the best available data resources on China's debt markets to be shared among the research team.

  • We will encourage the dissemination of our research on debt capital markets in an accessible form relevant to policy makers, finance practitioners and a broad international community of academics.

UK Team: Economic and Social Research Council (ESRC). Grant number ES/P004237/1.
China Team: National Natural Science Foundation of China (NSFC).
Start date: 01/01/2017
End date: 31/12/2019