China to introduce bond index mutual funds to better integrate its bond markets
May 21, 2019 (China Knowledge) - China is now planning to launch pilot bond index mutual funds that can be traded on the country’s stock exchanges or interbank market as part of its efforts to interconnected its segmented USD 13 trillion bond market.
The China Securities Regulatory Commission (CSRC) will be responsible for reviewing registration of these funds and the pilot program will be another step forward towards being able to meet the needs of foreign and domestic investors in terms of Chinese bond index products.
Currently, Chinese bonds are traded on both the interbank market and the country’s stock exchanges and are subject to different rules and regulations. The interbank market is regulated by the National Association of Financial Market Institutional Investors (NAFMII) while bonds traded on the stock exchanges are regulated by the CSRC.
As a result, lax supervision and differing standards on debt issuances have led to investors being able to profit from regulatory arbitrage over the last few years.
For example, many property developers turned towards the country’s exchange-traded markets to issue bonds rather than the interbank market taking advantage of looser regulations on the exchange-traded markets amid a nationwide credit crunch last year.
Chinese authorities now aim to re-unify these segmented bond markets with the People’s Bank of China, CSRC and NAFMII all working together to develop new frameworks for the bond market starting by unifying vetting standards of rating agencies on both the interbank and exchange-traded markets.
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