Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
The Goldman Sachs Group, Inc.
China’s domestic bond market has increased six-fold over the past decade to reach RMB40tn (USD6.3tn), making this the third largest domestic bond market in the world. We forecast it could more than triple to USD21.6tn by 2025, with bond market development being one of the key pillars of China’s financial reforms. We see this becoming one of the most important capital markets for both Chinese borrowers and domestic investors. It will also have rising importance for international fund managers, with potentially more than USD1tn of global fixed income funds flowing into China over the coming years.
China’s domestic bond market
The Next Financing Engine
Hao Tang [email protected] +852-2978-2676Goldman Sachs (Asia) L.L.C.
Kenneth [email protected] +852-2978-7468 Goldman Sachs (Asia) L.L.C.
MK [email protected]+852-2978-6634Goldman Sachs (Asia) L.L.C
GLOBAL MACRO RESEARCH | SEPTEMBER 21, 2015
Maggie Wei [email protected] +852-2978-0106Goldman Sachs (Asia) L.L.C.
September 21, 2015 China
Goldman Sachs Global Investment Research 2
Table of contents
Executive Summary 3
Eight key numbers on China’s bond market 5
Part One – The current state of China’s USD 6 tn bond market 6
Part Two – Significant potential for bond market over next 10 years 10
Part Three – An opportunity for foreign investors 14
Part Four – Beyond the banks: Need for a diverse investor base 18
Part Five – What needs to be done to improve the market? 21
Part Six – Breakdown of China’s domestic bond market 23
Box 1: Regulating the China bond market 24
Part Seven – Government related bonds the bulk of the market 27
Box 2: LGFV draft rule: A positive step towards addressing moral hazard issues 31
Part Eight – Corporate sector bonds dominated by SOEs 32
Disclosure Appendix 39
Glossary: CBRC: China Banking Regulatory Commission; CP: Commercial Paper; CSRC: China Securities Regulatory
Commission; LGFV: Local government financing vehicle; MOF: Ministry of Finance; MTN: Medium Term Note; NAFMII: National Association of Financial Market Institutional Investors; NDRC: National Development & Reform Commission;
NPL: Non performing loans; PBOC: People’s Bank of China; PPN: Private Placement Note SAFE: State Administration
of Foreign Exchange; SCP: Short-Term Commercial Paper; TSF: Total Social Financing; WMP: Wealth management
product
Notes on authorship: This report has been jointly authored by our Asia Credit strategy team and our Asia economists.
The views of the individual analysts, and their areas of expertise, are identified within; no other analyst is responsible.
The authors would also like to thank the following economists, strategy, and sector analysts for their assistance with this
publication: Steve Strongin, Francesco Garzarelli, Jan Hatzius, Charlie Himmelberg, Sandra Lawson, Katherine Maxwell,
Timothy Moe and Andrew Tilton.
September 21, 2015 China
Goldman Sachs Global Investment Research 3
Executive Summary
China’s bond market to reach USD 21.6tn by 2025
China’s capital markets have come a long way over the past ten years. Back in 2006, the
country’s bond market capitalization to GDP was 27%, and we estimated then in a global
paper that it could reach 60% by 20161. We have already exceeded that, with the total
amount of bonds expanding six-fold to reach RMB 40tn (USD 6.3tn) at the end of August
2015, equating to 62% of GDP and making this the third largest in the world behind the US
and Japan. However, China’s bond market as a share of GDP still lags behind that of other
Asian EM countries, and is substantially smaller than many DM countries. This provides
ample room for further growth, and we estimate the market could reach USD 21.6tn by
2025.
A USD 1 trillion opportunity for foreign investors…
China’s domestic bond market is largely closed, with foreign holdings of China domestic
bonds at around USD 115bn as of June, or 1.9% of the market. This reflects the restrictions
currently in place, with offshore investors required to go through one of the foreign
investment programs in order to gain access. Going forward, we expect more channels to
be introduced with enormous potential to draw in foreign investment. Should foreign
participation catch up to roughly the level of, say, Japan and Australia, equating to around
10% to 20% of GDP, that could mean more than USD 1tn of additional global fixed income
investments to be allocated to China domestic bonds in the coming years.
…alongside broader plans towards RMB internationalization
Policymakers may have concerns over the risks associated with opening of the bond
market, but we see positive benefits if appropriately calibrated. Our past research2 shows
that accessing foreign capital can diversify funding sources and introduce best practices
from different markets. In our view, allowing foreign investors better access to RMB
denominated financial investments is an important pillar for China to achieve its longer
term goals of full capital account liberalization and internationalization of the RMB. The
push for RMB inclusion into the IMF’s SDR is an indication of policymakers’ desires to
further integrate China’s financial system with the rest of the world.
Opening the market to private companies remains the big challenge
Over the past decade, a number of new products have been introduced and a broad range
of financial instruments are now available to borrowers. But despite the innovations,
government related entities still account for the bulk of the issuance, and we estimate that
state-related issuers account for 94% of total bonds outstanding. The need to open up the
market to the private sector, therefore, remains a key challenge. This will require
encouraging a more market determined pricing of credit and reducing the reliance on
implicit government support in making credit assessments – steps that should pave the
way towards expanding private sector participation.
1 See Francesco Garzarelli, Sandra Lawson, et al, “Bonding the BRICs: The Ascent of China’s Debt Capital Market”, November 20, 2006
2 See Andrew Tilton, Kenneth Ho, Sandra Lawson, Katherine Maxwell, MK Tang, et al., “Harnessing global capital to drive the next phase of China’s growth”, February 7, 2015
September 21, 2015 China
Goldman Sachs Global Investment Research 4
Banks are the biggest holders; further diversification needed
Holders of the China bond market remain highly concentrated, with commercial banks
owning 62% of the overall bond market. There is clearly considerable scope for further
diversification of the investor base, which carries a number of benefits. Having investors
with different investment objectives will allow a wider range of issuers and a wider set of
instruments to come to the market; and encouraging better access to the market will help
to channel the large savings towards more productive use. We see the biggest potential
impact to come from expansion and reforms in the management of pension and insurance
funds.
The next financing engine
The buildup of savings and drive towards interest rate liberalization will create additional
demand for yield products, and the existing limitations of the banking sector points
towards further diversification into bond financing. We expect further financial reforms will
help to drive the bond market to become the next financing engine. We believe that the
bond market will become one of the most important capital markets not only for domestic
investors, but also a market with rising importance for international investors.
September 21, 2015 China
Goldman Sachs Global Investment Research 5
Eight key numbers on China’s bond market
September 21, 2015 China
Goldman Sachs Global Investment Research 6
Part One – The current state of China’s USD 6 tn bond market
The Evolving Credit System in China
Over the past decade, China has taken enormous strides to develop its bond market. The
efforts have been in tandem with broader financial reforms, ranging from interest rate
deregulation, to the development of the offshore RMB market, to the easing of capital
controls. In a global paper written in 2006, we expected the Chinese bond market
capitalization could reach over 60% of GDP by 2016, compared with 27% when the report
was written (see “Bonding the BRICs: The Ascent of China’s Debt Capital Market”,
November 2006). It appears that we have already surpassed that target, with the China
bond market having reached 62% of GDP at the end of August 2015. In nominal terms, the
market has expanded six-fold in size to RMB 40tn at the end of August 2015, making this
the 3rd largest bond market in the world (see Exhibit 1).
Exhibit 1: China’s bond market has surged six-fold in size since 2006 China domestic bonds outstanding (RMB tn)
Source: Wind.
Despite the rapid growth over the past decade, China’s bond market is still small as a share
of GDP compared to global and regional peers. It lags behind other Asian EM countries,
such as Malaysia and Thailand, and is substantially smaller compared with DM countries
like Japan, US, and the UK (see Exhibit 2). Although a number of innovations have been
introduced into the bond market, there is still room for substantial improvements. The pace
of China’s credit growth has been rapid in recent years, with total social financing3 (TSF)
increasing at a CAGR of 22% from the end of 2006 to July 2015. As such, the growth in the
bond market has merely kept pace with the overall increase in China’s credit growth. In our
view, the bond market is not yet the financing engine that we think it can be.
As mentioned in our report back in 2006, a key factor which hampered the development of
China’s bond market was that the market was overwhelmingly concentrated in securities
issued either by the government or by publicly-controlled policy banks, whilst the
3 Total social financing is a measure of the total amount of financing the real economy (i.e. non-financial corporates and individuals) gets from the financial system. Currently the indicator mainly includes loans denominated in local and foreign currencies, entrusted loans, trust loans, bank acceptance bills, corporate bonds, equity financing,etc.
40 tn
0
5
10
15
20
25
30
35
40
45
2006 2007 2008 2009 2010 2011 2012 2013 2014 Aug-15
September 21, 2015 China
Goldman Sachs Global Investment Research 7
corporate sector was severely under-represented. The inability for private enterprises to
obtain bond market funding has been one of the factors leading to the rapid expansion of
alternative financing channels such as trusts loans. These types of financings were a
negligible part of the credit system back in 2006, but they have ballooned more than five-
fold since 2009 to now account for about 17% of China’s credit stock, although
policymakers have made recent efforts to curb their growth. As noted in our China Credit
Conundrum piece written in July 2013, certain parts of these types of financing carry
significant risks, and this is compounded by the lack of transparency in these products (see
“The China credit conundrum: Risks, paths and implications”, July 26, 2013). This is an
area that we think the bond market can play a much bigger part and serve as a substitute.
In addition, a significant proportion of trusts, entrusted loans and bank acceptance bills are
what are called “non-standard” credits, or “shadow banking” credits by many—i.e., credits
that are not booked as bank loans but are effectively intermediated and funded by banks. A
well-developed debt capital market will improve financial risk diversification.
Exhibit 2: China’s bond market still small relative to GDPDomestic debt securities outstanding/nominal GDP at 1Q15
(%)
Exhibit 3: Bonds remain a small proportion of credit Total social financing outstanding (RMB tn)
Source: Haver Analytics, AsiaBondsOnline.
Source: PBOC, Gao Hua Securities Research
Push and pull factors to drive more bond financing
The pull factor stems from the further buildup of savings, creating additional demand for
yield products. China’s gradual drive toward interest rate liberalization will increase the
proliferation of non-deposit saving vehicles. The widening spectrum of financial services to
improve the social safety net will continue to promote a rapid expansion of institutional
investors such as insurance and pension funds. These developments should create more
demand for direct financing via the bond market.
The push factor stems from the existing limitations of the banking sector. China’s
commercial banks are facing capital and funding constraints, which restrains their capacity
to create new loans. In contrast, bond financing offers many comparative advantages such
as greater transparency, broader credit risk diversification and “crowding in” (creating a
greater capacity for banks to lend to small enterprises by moving the bigger borrowers to
the bond market).
Partly reflecting these considerations, the authorities have been incrementally driving
credit flows toward the bond market with an approach known as “blocking the backdoor,
while opening up the front door”: on the one hand, the authorities have tightened
51%
0%
50%
100%
150%
200%
250%
0%
2%
4%
6%
8%
10%
12%
0
20
40
60
80
100
120
140
160
06 07 08 09 10 11 12 13 14 July2015
Corporate bondTrust loans and entrusted loansOtherRmb loansCorporate bond as % of TSF (RHS)
September 21, 2015 China
Goldman Sachs Global Investment Research 8
regulation to curb shadow banking, but on the other hand, they have also widened access
to bond issuance, notably by allowing local governments to issue municipal bonds and
some property developers to issue corporate bonds.
Financial reforms, capital account liberalization and global RMB
From a macro standpoint, as the bond market gradually overcomes existing frictions and
becomes the next key financing engine in China, we believe it will hold even greater sway
over the financial conditions of the economy.4 A well-developed bond market can also
benefit the whole financial system in China via more transparent risk pricing and more
efficient resource allocation. Further reforms to advance domestic financial liberalization
and capital account convertibility will continue, and this will push China’s debt capital
markets to the next phase of development.
Capital account liberalization has been an ongoing process for China over the past years,
with the drive further energized recently by the push for RMB inclusion into the IMF’s
Special Drawing Rights (decision scheduled for late this year). In the past few months,
several notable liberalization measures have taken place: E.g., global central banks and
sovereign wealth funds given improved access starting in July, foreigners can now directly
purchase onshore mutual funds under a new program called Mutual Recognition of Funds.
Bulk of market dominated by government-related issuers
Broadly speaking, the China bond market can be segregated into three categories –
government and municipal bonds, financial sector bonds, and corporate sector bonds.
Each of these segments occupy approximately one third of the bond market (see Exhibit 4),
which is a marked changed from a decade ago, when central government and financial
bonds represented over 90% of the market.
Exhibit 4: Corporate sector bonds, government sector bonds and financial sector bonds
each represent around 1/3rd of the bond market Breakdown of the China bond market at the end of August 2015
Source: Wind, Goldman Sachs Global Investment Research.
4 Long-term bond yields in China already seem to have been meaningfully affecting overall financing conditions in China (see Asia Economics Analyst: The long and the short of Chinese financing conditions, September 5, 2014).
Central Govt and Municipal
Bond32%
Financial Bond34%
Corporate Sector Bond
33%
Other 1%
September 21, 2015 China
Goldman Sachs Global Investment Research 9
Although it appears that this is a well-diversified market, the bulk of the bond issuance is
from government related entities. If commercial banks and corporates that have central or
local governments as major shareholders are classified as government related issuers, we
estimate that around 94% of the bond issues are by entities that are related to the
government. This means only 6% of total issuance is coming from private enterprises. We
shall discuss this further in later sections, and below is a brief summary of the various
segments within the China bond market:
Government and municipal bonds
Aggregate amount outstanding represents approximately 32% of the market as at the end
of August 2015. This segment is represented by:
Central government bonds (25% of total bond market) – bonds issued by the
central government.
Municipal bonds (7%) – the municipal bond market was expanded less than a year
ago to assist local government in their financing needs.
Financial Sector Bonds
Aggregate amount outstanding represents approximately 34% of the market as at the end
of August 2015. This segment is represented by:
Policy bank bonds (26%) – these form the majority of financial sector bonds, and
include institutions such as China Development Bank, Agricultural Development Bank
of China and the Export-Import Bank of China.
Commercial bank bonds (4%) – the bulk of commercial bank bond issues are issued
by the big four banks, and they all have the central government as the major
shareholder.
Other financial bonds (4%) – these include insurance companies and securities
houses.
Corporate Sector Bonds
Aggregate amount outstanding represents approximately 33% of the market as at the end
of August 2015. This segment has seen the most rapid growth and is represented by:
Enterprise bonds (8%) – this is the most established corporate sector bond market,
regulated by the National Development and Reform Commission (NDRC). Issuers are
typically large state-owned enterprises.
Corporate bonds (2%) – this market is regulated by CSRC, the stock exchange
regulator, and issuers are mostly listed companies with the bonds traded on the stock
exchange.
Corporate instruments regulated by NAFMII (20%) – NAFMII is a regulatory body
under the supervision of PBOC and the instruments include commercial paper, short-
term commercial paper, medium term notes and private placement notes. A range of
different issuers utilize this market.
Government supported company bonds (3%) – these are issued by entities that
carry strong government support, such as the China Railway Bureau.
September 21, 2015 China
Goldman Sachs Global Investment Research 10
Part Two – Significant potential for bond market over next 10 years
Bond market to reach 97% of GDP by 2025, from 54% last year
While it may take some time for the aforementioned key issues associated with the
corporate bond market to be addressed, we do see the potential of the China bond market
to expand further in the next few years. In order to quantify the potential growth of the
China bond market in the next 10 years, we conducted a bottom-up analysis and estimated
growth of each market segment in relation to the GDP. The estimation is separated into
two parts – growth issuance from the public sector, and from the private sector – and
based on our estimates, we expect the size of the market to reach 97% of GDP by 2025, or
RMB 136tn from the current outstanding RMB 40tn, equivalent to 62% of GDP.
Part One: Estimating public sector issuance
Estimating public sector issuance focuses on the growth in treasury bonds, policy bank
bonds and municipal bonds. For these bond types, we adopt the assumption that the
infrastructure spending by the government will decrease gradually, in line with the gradual
slowdown of nominal GDP growth. The backdrop of this assumption is that over the short
to medium horizon, infrastructure investment will still be one of the main supports to
economic growth, and in the long run, ongoing urbanization creates a continued need for
infrastructure spending. We also expect that over time all the existing non-bond
borrowings (such as bank loans and trust financings) by local governments will shift to
bond financing, following the Article 43 regulation issued by the state council late last year.
Treasury bond market to reach RMB 32tn by 2025. We expect Treasury bond issuance in
the next few years to be driven by the cumulative fiscal deficits. Fiscal policies will likely be
more active in the next few years, as the government takes up more social service
responsibilities in the face of slowing growth. We expect the general government fiscal
deficit to gradually increase in the next few years, and stay at around 3% in the outer years.
The implied funding need will total around RMB 33tn, out of which we assume 70% will be
sourced from Treasury bond issuance, similar to the share of Treasury bonds in the latest
budget report in 2014. This would indicate an additional RMB 23tn net increase in the
treasury bond market, and the total size of Treasury bond will amount to RMB 32tn by 2025
from RMB 9.7tn in May 2015.
Policy bank and municipal bonds to reach RMB 69bn by 2025. The growth in the
issuance of policy bank bonds and municipals will in part be due to the need for them to
support infrastructure spending, but also to replace the non-bond financings such as trusts
and other types of borrowings. We did not separate our forecasts for policy bank bonds
and municipal bonds, because these two types of bonds are both designed to finance
public sector expenditure, and we estimate that amount outstanding will reach RMB 69tn in
2025, from RMB 15tn at the end of May 2015.
The key assumptions here:
1. 30% of the general government fiscal deficits will be met by policy bank bond and
municipal bond issuance (as discussed above we expect 70% of general government
fiscal deficits to be met by treasury bond issuance).
2. Besides the additional issuance related to fiscal deficits, the future total size of these
two types of bonds will increase at a similar pace with infrastructure investment
growth, which is then projected based on our GFCF forecasts from 2015 till 2018, and
Rising fiscal deficit and
government spending
plans to drive treasury
bond issuance
Infrastructure spending
and refinancing to spur
issuance of policy bank
and municipal bonds
September 21, 2015 China
Goldman Sachs Global Investment Research 11
mapped to our nominal GDP growth forecasts from 2018 onwards5. Local government
used to rely on land sales to finance infrastructure investment, but with a cooling
housing market and the ongoing land reforms, we believe local government will be
less reliant on land sales and thus more financing will be done through other channels
such as bond issuance.
3. Current non-bond borrowing by local governments can potentially be replaced with
bond issuance in the next 10 years, in reflection of the latest fiscal reform move and
the authorities’ commitment to improve local government debt management. This
indicates a potential net increase of RMB 10 tn in overall bonds by 2025.
4. While we expect more bond issuance to finance infrastructure investment in the future,
we also build in some development of Public-Private Partnership (PPP) in the next ten
years. PPP has recently been frequently cited as a solution for financing infrastructure
projects by the policy makers recently. We believe PPP will be growing gradually in the
next ten years and assumed that around 10% of infrastructure investment/around RMB
5 tn will be financed via PPP by 2025 (which is still relatively small compared with the
amount financed via bond issuance).
Part Two: Private sector issuance to stay high, then slow down
The second part of our projection focuses on corporate bonds and financial bonds. Our
forecasts in this section excludes local government financing vehicles (LGFV)6 and policy
bank bond issuance, both of which are included in the previous section’s analysis, as they
are considered public sector borrowings. We expect the yoy growth rate for private sector
issuance to remain high for the next few years and then gradually slow down to be in line
with our expected nominal growth rate for GDP in the outer years.
Corporate bonds to reach RMB 25tn by 2025. We define corporate bonds as those issued
by SOEs and private enterprises, but exclude LGFV bonds as we expect them to be
replaced by municipal bonds going forward. Prior to 2013, the amount of corporate bonds
outstanding was increasing annually by over 30%, following the introduction of new types
of instruments and a nascent market. Since 2013, the growth rate has slowed to below 20%,
and for the first eight months of 2015, the yoy increase was 16.1%. Going forward, we are
assuming that the growth rate in the next few years will remain at a similar level as we
have seen this year (16.1%), at above the pace of nominal GDP growth. This is based on
our expectation that policy support will be in place to facilitate more corporates to access
the bond market, and that there remains a large section of the private sector that are still
underserved. For simplicity, we estimate yoy growth in corporate bond outstanding will
stay at 16.1% till 2017, and then gradually slow down till it reaches our projected nominal
GDP growth by 2022 (7.23%). From 2022-2025, we assume the growth rate for this sector
will be in line with our projected nominal GDP growth. Our projected path of growth for
corporate bonds is shown in Exhibit 5. Under this path, we estimate corporate bonds to
reach RMB25tn, or 18% of GDP, by 2025.
Financial bonds (ex. policy bank bonds) to reach RMB 10tn by 2025. This sector
comprises bonds issued by commercial banks, securities firms, and insurance firms.
5 See Global Paper No: 208: The BRICs 10 Years On: Halfway Through The Great Transformation, Dec 7, 2011 for our forecasts of nominal GDP growth in outer years
6 Until the formulation of the municipal bond market at the end of 2014, local governments in China were not allowed to borrow. Given this funding constraint, local governments set up LGFVs and utilized these vehicles to borrow money and perform some of the fiscal investments on behalf of the local governments. LGFV debts do not carry a guarantee by the local governments, and rely on implicit support. Because much of these borrowings have been used for fiscal expenditure, we consider them part of public sector issuance when we formulate our projections. Please see Part Seven of this report for a fuller discussion on LGFVs.
Government to help
private companies
access the bond market
as many underserved
September 21, 2015 China
Goldman Sachs Global Investment Research 12
Historically, the growth in commercial bank bond issuance have followed that of TSF
growth, with notable increase in issuance volume in 2008 and 2009, a slowdown in 2010
and also slower growth in 2013 and 2014. But in recent years, we have seen a much faster
pace of growth in bond issuance by securities firms. In 2006, securities firms accounted for
2% of non-policy bank financial bond outstanding, and they now represent 32% (up from
20% at the end of 2014). In fact, we have seen a 52%yoy increase in the amount of financial
bonds (ex. policy bank bonds) outstanding as of August this year, the bulk of the growth
having been driven by securities firm issuance. We view this sharp increase in securities
firm issuance over the past year as being driven by the strong performance in the domestic
equity market (before the sharp correction in 2H). Going forward, we are assuming that the
increase in financial bond issuance will be more gradual, and follow a path similar to that
of TSF growth. As such, our assumptions from 2016 onwards are similar to the
assumptions we are using to project the growth in the corporate bond market, namely that
it will increase at 16.1% yoy (above the pace of TSF growth) till 2017, then gradually slow
down until the pace of growth reaches our projected nominal GDP growth by 2022 (see
Exhibit 6). Under these assumptions, we expect the sector to grow to RMB10tn, or around
7% of GDP, by 2025.
Exhibit 5: Pace of growth to slow for non-LGFV
corporates notional outstanding yoy growth of outstanding non-LGFV corporates
Exhibit 6: Our projected path of growth for non-policy
bank financials notional outstanding yoy growth of outstanding non-policy-bank financials
Source: Wind, Goldman Sachs Global Investment Research.
Source: Wind, Goldman Sachs Global Investment Research.
Results are similar when adopting a top down approach
With our bottom up approach, we estimate that the size of the China bond market could
reach RMB 136tn by 2025, or 97% of GDP from 62% now. As a crosscheck, we conducted a
second estimation using a top down approach, using a methodology that was used in our
previous work back in 2006 to estimate the growth of the market. Under this approach, we
derived the expected overall bond market size relative to GDP using three factors: the
income level (represented by GDP per capita growth), demographics (represented by the
dependency ratio), and the degree of financial liberalization (represented by financial
16%
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Forecast
7%
0%
10%
20%
30%
40%
50%
60%
07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Forecast
September 21, 2015 China
Goldman Sachs Global Investment Research 13
liberalization index developed by Kaminsky and Schmukler7. Our analysis relies on a panel
of data for all G7 countries from the early 1970s to the mid-1990s, looking at the evolution
of those markets and the factors that drove their development. The bond markets of
Europe and Japan increased, on average, by the equivalent of 70% of GDP between 1970
and 1995, and we estimate that just over two-thirds of this growth can be attributed to the
expansion in income per capital. Adopting this model and using our assumptions for
China’s per capital income growth over the next decade, we arrive at a top down
estimation of the bond market size will be 99% of GDP by 2025, in line with our bottom up
estimate of 97% (Exhibit 7).
Exhibit 7: Top down approach review
Source: Goldman Sachs Global Investment Research
Exhibit 8: Projected bond market size (relative to GDP) Bond market size as percentage of GDP (%)
Source: Goldman Sachs Global Investment Research
7 The index is based on various criteria including degree of restriction in the banking sector, stock market and capital account.
Factor CoefficientProjected chg in the
next 10 yearsImplied % of GDP change
A 10% increase in per-capita GDP 2.5 8.6 21.4
A full financial liberalisation 12.2 1.0 12.2
A 1 point increase in the ’dependency ratio’ 1.8 6.4 11.6
R-SquareDurbin-Watson
Implied bond market size to GDP(%) by 2025
vs bottom-up approach projection
0.41
2.03
99
97
Top-down projection approach review
0
20
40
60
80
100
120
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Treasury bondsMunicipal, policy bank and LGFV related corporate bonds
Other corporate and commercial bank bonds
September 21, 2015 China
Goldman Sachs Global Investment Research 14
Part Three – An opportunity for foreign investors
China’s bond market still largely closed, but starting to open up
Although the China domestic bond market is one of the largest in the world, foreign
participation is minimal. Foreign holdings of China domestic bonds were around RMB
764bn at the end of June 2015, or around 1.9% of the market. The reason for the low
foreign penetration is because offshore investors are required to go through one of the
quota- and case-by-case approval- based foreign investment programs in order to gain
access. We have seen the size of the quota increase rapidly in recent years, but this is from
a very low base. While headlines on financial market liberalization in the past year have
largely focused on the equity market, we think that there is significant room for offshore
access to the bond market to increase substantially.
There are three main programs in existence allowing foreign access to domestic bonds,
namely QFII, RQFII and the PBOC bond program pilot.
1. The Qualified Foreign Institutional Investor (QFII) program. The QFII program was
launched in 2002 to allow qualified foreign investors to invest in the domestic
securities market. The program is regulated by CSRC, SAFE and PBOC, with SAFE
setting the investment quota for the qualified institutional investors and CSRC
regulating the onshore securities investments by these investors. Together with SAFE,
PBOC monitors and regulates the remittance and repatriation of funds across the
border. The authorities have been relaxing the QFII investment restrictions since March
2013. In particular, QFIIs can now apply to the PBOC for access to the interbank bond
market (while previously, they could only invest in the exchange traded bond market,
which is much smaller and less liquid). That said, although the QFII quota approved by
SAFE have been expanding fast by over 40% yoy, the scale is still fairly small at about
USD 77bn as of August ’15, and only about 10% of QFII’s $49bn net investment was in
bonds as of end-2014, with the remainder mostly in equities. The low share in bonds
owes much to the strict approval process for access to the bond market.
2. The Renminbi Qualified Foreign Institutional Investor (RQFII) program. The RQFII
program was launched in December 2011 to allow Chinese financial firms to establish
RMB denominated funds in Hong Kong, through which overseas investors can use
offshore RMB to invest in the onshore securities markets. Like the QFII program, the
RQFII program is jointly regulated by CSRC, SAFE and PBoC. The rules for the program
have been relaxed, and newly approved RQFII quotas are no longer subject to rigid
asset allocation rules. Like the QFII program, the scale of the RQFII quota is still
relatively small at USD 64bn at the end of August 2015, despite rapid growth, and net
investment is even smaller still, at about US$28bn at end-2014. There is no disclosure
on the type of assets investment through the RQFII program, though we believe that
portion invested in bonds is higher than the 10% for the QFII program.
3. PBOC bond program. This program was launched in 2010 and is separate from
QFII/RQFII. It was originally based on a case-by-case approval by the PBOC, and
investors included foreign central banks, sovereign wealth funds, insurance companies,
international organizations and offshore RMB clearing and participating banks. In late
May, the PBOC significantly loosened investment restrictions for offshore RMB
clearing and participating banks under this program, allowing them to use their bond
holdings to conduct repo financing and take the proceeds back offshore. Following up
on that, in mid-July, the PBOC further eased bond investment by allowing foreign
central banks, sovereign wealth funds and international financial institutions to
participate in onshore interbank bond market through a registration-system. These
investors tend to have particularly long-term investment mandate.
September 21, 2015 China
Goldman Sachs Global Investment Research 15
Exhibit 9: QFII and RQFII approved quota has been growing, but still relatively small
Source: CEIC, Goldman Sachs Global Investment Research.
Through the various existing programs, the total number of foreign institutional investors
allowed to invest in the interbank bond market has grown to about 252 as of Aug 2015
(Exhibit 10), and their total investment was about RMB 764bn as of June. (Exhibit 11).
While the scale has been on a fast upward trend, so far it represents only about 1.9% of the
onshore bond market capitalization; and even including offshore RMB bonds, foreign
holdings still account for only about 3% of total RMB bonds outstanding.
Exhibit 10: Foreign access to the bond market has grownNumber of foreign institutional investors allowed access to
the bond market
Exhibit 11: Foreigners’ investment in the bond market
has risen fast, although still of limited scale Data in USD bn
Source: PBOC (financial market operation report), Shanghai Clearing House.
Source: BIS.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
10
20
30
40
50
60
70
80
90
Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15
QFII approved quota (USD bn)
RQFII approved quota (USD bn equiv.)
QFII+RQFII approved quota as % of A share market cap (RHS)
51
100
138
211
252
0
50
100
150
200
250
300
2011 2012 2013 2014 Aug-150
20
40
60
80
100
120
140
Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Onshore RMB bonds held by overseas entities
Offshore RMB debt securities outstanding
September 21, 2015 China
Goldman Sachs Global Investment Research 16
Enormous potential to draw in foreign investment
With the China bond market already the third largest in the world and with considerable
scope to expand further, it has the potential to become a sizeable opportunity for global
bond investors. In our view, the Chinese authorities have a strong intention to push ahead
with the liberalization of the bond market as a way to foster its development, both in terms
of size and sophistication – indeed a key policy objective that is closely intertwined with the
ongoing efforts to advance RMB internationalization.
We expect more channels will be introduced to allow wider foreigners’ access. The Chinese
authorities have announced that starting July 1, foreigners can directly purchase onshore
mutual funds under a new program called Mutual Recognition of Funds. According to the
authorities, there are currently a total of 850 onshore mutual funds with RMB 2tn in AUM
that are eligible for the program, with close to half of those equipped with a bond
investment mandate (i.e., either dedicated bond funds or “mixed” funds with stock and
bond investment). While the initial quota is set at RMB 300bn for total foreigners’ purchase
of onshore mutual funds, it will likely ramp up over time. Likewise, we expect a continued
increase in the scale of the existing QFII/RQFII and PBOC bond program. We also believe
more loosening of the investment restrictions on those programs will be likely (e.g., relax
approval for RQFII/QFII investors to access the interbank bond market, loosen lock-up and
repatriation regulations, allow wider use of derivatives), thereby making investment in the
onshore bond market even more attractive to global investors.
How much can foreign holdings grow?
To make a rough gauge on the size of potential scope for foreign participation in China’s
bond market, we took a look at current foreign participation in a few other more opened
markets.
Even if we only look at possible foreign official holdings, RMB also has a lot of room to
develop: According to IMF COFER data, foreign official holdings of RMB amounted to
around 1% of China GDP, while in countries like Canada and Australia, foreign official
investors holding is around 6-8% of GDP (see Exhibit 12) If foreign official holdings of RMB
catches up with the current size for AUD or CAD, that would imply around 600 bn USD
confirmed inflows into RMB.
More broadly, compared with the size of international debt securities denominated in other
major currencies, the scope for RMB/China bonds to rise in relevance in the world
marketplace is clearly considerable: Should RMB/China bonds catch up to roughly the level
of, say, JPY and AUD bonds in terms of foreign penetration (i.e., foreigner holdings
reaching about 10%-20% of GDP), that could mean an additional over $1tn in global fixed
income investment to be allocated to RMB/China bonds. This amount would be
significantly higher still should RMB/China bonds reach the sort of foreign penetration seen
for EUR and USD bonds (about 60-70% of GDP).
September 21, 2015 China
Goldman Sachs Global Investment Research 17
Exhibit 12: Official FX holdings of CNY at comparatively
low levels Official FX Holdings as % of GDP as of end 2014
Exhibit 13: Massive scope for global bond investment to
be reallocated to China/RMB bonds going forward… International debt securities as % of GDP as of end 2014
Source: IMF COEFR, Haver Analytics
Source: BIS, IMF, CEIC, Goldman Sachs Global Investment Research
1.1
0
5
10
15
20
25
0
5
10
15
20
25
USD EUR GBP AUD CAD JPY SWF CNY
2.10
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
GBP EUR USD NZD AUD CAD JPY CNY
September 21, 2015 China
Goldman Sachs Global Investment Research 18
Part Four – Beyond the banks: Need for a diverse investor base
Bonds held mostly by banks, pension funds likely to boost buying
Despite the rapid growth in the size of the bond market, the holders of the bond market
remain highly concentrated. According to data provided by Chinabond.com.cn (data which
we estimate represents around 80% of the bond market), commercial banks held 65% of
the overall bond market in 2006. These proportions have remained broadly unchanged,
with commercial banks owning 62% of the overall bond market in July 2015. In terms of
government bonds, the percentage is even higher, with domestic banks holding around
75% of outstanding issuance at the end of 2012, compared with a G-20 average of less than
20% (see Exhibit 14).
Creating a broader set of investors with different investment objectives though will allow a
wider range of issuers and a wider set of instruments to come to the market. We see
pension funds as probably the single largest potential boost to bond demand. First, there
remains a large scope for the assets of state-provided basic pension (“pillar 1”) to increase,
given the financing short-falls under the current pay-as-you-go system and the ageing
demographics. Second, a more systematic and professional approach to managing the
basic pension assets, could lead to a significant increase in corporate bond investment.
Third, the “enterprise annuity” segment of the pension system is a promising growth
area—it is indeed a policy priority, as the government has recently introduced tax deferral
(early this year) and relaxed the investment restrictions regarding enterprise annuity assets
(in March last year) in order to encourage a greater participation in the voluntary pension
scheme.
Exhibit 14: Commercial banks hold a much larger share of government bonds in China Share of government bonds held by banks
Source: Asia Bond Online
75%
0
10
20
30
40
50
60
70
80
We see pension funds as probably the single largest potential boost to bond demand
September 21, 2015 China
Goldman Sachs Global Investment Research 19
Exhibit 15: Bond holding still concentrated in commercial banks Bond holding breakdown by holder type
Source: Chinabond.com.cn.
We see considerable scope for other segments to increase the demand for bond holdings.
As shown in Exhibit 16, non-bank financial assets reached RMB 48tn at the end of 2014,
more than double the level at the end of 2011. We see demand for bond holdings coming
mainly from the following five broad sets of institutional investors:
Pension funds, carrying roughly RMB 3.6tn in assets. Most of them are still managed
at local government level in an unsystematic manner, and have been restricted to
invest only in bank deposits and government bonds, until recent relaxations8. There is
a part of the pension funds called “enterprise annuity”, which is essentially voluntary
company-provided pension plans (or the so-called “pillar 2” pension) and is managed
by professional asset managers subject to relatively loose investment restrictions. But
this part of the system is still relatively small, at only about RMB 600bn.
Insurance funds, carrying around RMB 11.2tn in assets. About RMB 1.1tn of this is
social insurance provided by the state (e.g., unemployment insurance). Currently,
according to CIRC, about as much as about 30% is in low-yielding bank deposits.
Collective trust funds, carrying around RMB 5.6tn in assets. Their investors are
mostly high net worth individuals with higher risk tolerance and looking for higher
returns. According to China Trust Association, about RMB 1.3tn in trust assets are
dedicated to bond investment.
Mutual funds, carrying about RMB 6.7tn in assets. They cater mostly to mass retail
investors. About 60% of their assets are invested in bonds, according to ChinaBond
data.
Wealth management products (banks-managed), carrying about RMB 15tn in assets.
They are popular alternative non-bank deposit savings vehicles for households.
Approximately 44% of their assets are invested in bonds and money market
instruments as of end 2014, according to CBRC data.
Beyond domestic non-bank investors, allowing greater participation by foreigners in the
bond market would certainly be another key element in diversifying and expanding the
investor base.
8 In August, the State Council approved basic pension funds to invest up to 30% of their assets in listed equities, equity mutual funds, mixed funds etc.
Whole market Corporate sector Whole market Corporate SectorHolder Type % % % %
Commercial Banks 62% 29% 65% 35%Funds Institutions 13% 32% 3% 12%Insurance Insitutions 7% 9% 10% 30%Special Members 6% 1% 6% 0%Exchanges 5% 20% 6% 7%Credit Cooperative Banks 2% 4% 4% 5%Others 2% 1% 0% 1%Securities Companies 1% 4% 0% 2%Non-bank Financial Institutions 0% 0% 5% 6%Non-financial Institutions 0% 0% 0% 1%Individuals 0% 0% 0% 0%
Total 100% 100% 100% 100%
(Data in RMB bn)July 2015 2006
September 21, 2015 China
Goldman Sachs Global Investment Research 20
Exhibit 16: The non-bank institutional investor base has been expanding in size
Source: CEIC, CIRC, NSSF
32
33
34
35
36
37
38
39
40
41
42
0
10
20
30
40
50
60
2011 2012 2013 2014
WMPMutual fundsFund trustInsurancePensionBanks' holding in total non-MOF bond (%, RHS)
Banks' share in non-MOF bonds (%)
Non-bank financial asset size (RMB tn)
September 21, 2015 China
Goldman Sachs Global Investment Research 21
Part Five – What needs to be done to improve the market?
Despite the rapid growth over the past decade, there is still ample scope for further
development. This includes areas such as improving market access for private enterprises,
developing a broader investor base, and improving the trading liquidity of the market.
Below are areas of improvement we have identified:
Reduce moral hazard issues – in our view, one of the reasons why the market is so
heavily concentrated by state-related entities is the implicit support that these bond
carry. The expectation that state-related entities will be supported by the government
has led to SOEs and LGFVs being able to tap the bond market, despite some of those
issuers having very weak financial performance and crowding out private enterprises.
In our view, tackling the problems of moral hazard requires reforming of the SOE
sectors, and we are seeing tentative steps in that direction. In July 2014, the State-
owned Assets Supervision and Administration Commission announced that six SOEs
have been selected for a pilot program to deepen mixed ownership reform, and further
reforms are expected. We also saw the first SOE defaulting on its bond obligation,
when wholly state-owned Baoding Tianwei Group Company missed an interest
payment in April this year on its RMB 1.5bn medium term note. We see this default as
an important step towards more reforms, and how this default will be handled could
provide us with more clues as to how over-levered SOE will resolve and restructure
their indebtedness.
Promote price-based monetary policy– market pricing has been assuming an
increasing role in allocating credit in China’s financial system. This has been led by the
shift in the PBOC’s policy framework, which has gradually been relying less heavily on
direct controls over the bank loan market (such as through loan quota and bank
interest rates) and more on price-based mechanism centering around short-term
interbank interest rate management. Nevertheless, the process is by no means
complete. While bank loan rates have been fully liberalized, bank deposit rates are still
not fully market-driven, which mutes the role of price signals and contributes to
segmentation in the credit system. Moreover, despite recent progress, there is still
scope to further enrich the PBOC toolbox to secure more effective control over short-
term rates, as well as to strengthen communication and bolster guidance to market
participants regarding monetary policy intention. For instance, the sizable interbank
rate shocks in late 2013 caused volatile responses in the bond market—such episodes
could dent bond investors’ confidence, especially as interest rate hedging instruments
are still not very liquid. A greater stability and predictability of the monetary
environment would help promote growth of the bond market.
Improve co-ordination between regulators and better investor protection –
the establishment of NAFMII and the introduction of new types of products such as
MTN and PPN have been instrumental in driving the corporate bond market
significantly in recent years, and further development will be needed. For example,
more uniform rules and approval processes between the three different regulatory
would make it easier for companies to tap the different markets. And if the market is to
become more market determined and less reliant on implicit government support, then
the regulators will need to work on improving investor protection, such as tighter
covenant packages.
Clarify bankruptcy procedures– a new Enterprise Bankruptcy Law was introduced
in 2007 and was expected to be an important step in paving the way for creditors to
pursue claims via a bankruptcy process. In particular, the law streamlined the
bankruptcy process and unified procedures for SOEs and private enterprises. However,
the implementation of the law has been a challenge. In most cases of defaults that we
have come across, the workout was conducted via out-of-court settlements. As we
September 21, 2015 China
Goldman Sachs Global Investment Research 22
noted in a study we did on offshore defaults by Chinese companies9, local government
decisions often have a large impact on the resolution process. It is therefore possible
that creditors prefer to handle stressed situations by working with the local
governments, rather than via the bankruptcy process. In our view, it is difficult for
market pricing of credit risk to develop without further clarity on the default resolution
processes. However, since March 2014, we have seen four cases of defaults in the
corporate bond market (see Exhibit 17), and these could provide clues on the
resolution processes.
Exhibit 17: List of domestic bond default cases
Source: Goldman Sachs Global Investment Research.
Improve the credit rating process – corporate bond issuers require each bond issue to be
rated by a domestic credit rating agency. However, domestic credit ratings adopt a more
“top-down” approach than international credit rating agencies, meaning that heavy
emphasis is placed upon support by the parent entities or on the scale of the companies.
This can be seen in the LGFV bond ratings. As we noted in the China credit conundrum
piece we published in July 2013, LGFV bond issuers have very weak financials, and
therefore should carry low credit ratings. However, they are able to achieve domestic
ratings of AA- or above, as government support is incorporated, even though LGFV bonds
do not carry any explicit support from the local governments. This contrasts with
international rating agencies, which adopt a more “bottom-up” approach by looking more
at the standalone credit strength of the issuer. Whilst we believe that many of the state-
related entities do benefit from high levels of implicit support, allowing more
differentiation in credit ratings will help in better achieving a market determined pricing
mechanism.
Exhibit 18: Rating agencies ranked by est. market share as of August 2015
Source: Wind, Goldman Sachs Global Investment Research.
9 see “Recovery on China High Yield: May be greater than you think”, Asia Credit Line, November 10, 2011
Date Issuer SOE/PrivatePrincipal/interest
defaultBond type
Principal amount
March 7, 2014 Shanghai Chaori Solar Private Interest Corporate bond RMB 1bn
April 7, 2015 Cloud Live Technology Group Private Principal Corporate bond RMB 480mn
April 21, 2015 Baoding Tianwei Group Company SOE Interest Medium term note RMB 1.5bn
May 28, 2015 Zhuhai Zhongfu Private Principal Corporate bond RMB 590mn
Shanghai Brilliance,
9%
Dagong Global Co., 20%
China Lianhe Co.25%
Pengyuan Co., 7%
China Chengxin Co., 38%
Other, 1%
September 21, 2015 China
Goldman Sachs Global Investment Research 23
Part Six – Breakdown of China’s domestic bond market
China’s domestic bond market has changed significantly over the past decade. At the end
of 2006, the market size was below RMB 7tn, and the market was dominated by two types
of bonds – treasury bonds and financial bonds – that accounted for around 90% of the
overall bond market, with minimal contribution from the corporate sector. Since then,
annual issuance has grown rapidly. In 2006, annual new issuance of domestic bonds was
Rmb 2.4tn, and this increased by five-fold to reach Rmb 11.3tn by the end of 2014 (see
Exhibit 19). The strong increase in issuance has meant that the total amount outstanding
reached RMB 40tn at the end of August 2015.
Treasury bonds remain one of the largest parts of the bond market, accounting for 25% of
outstanding issues, though its market share has been steadily dropping. In 2006, treasury
bonds accounted for 54% of all outstanding bonds, but as Exhibit 19 shows, annual
treasury bond issuance has shown little growth, and has remained range bound between
RMB 1tn to Rmb 2tn each year. Financial bonds remain a significant part of the bond
market, accounting for 34% of the total market, compared with 38% in 2006. The most
meaningful growth has come from the corporate sector, which includes state-owned
enterprises, private companies and LGFVs. They now represent 33% of the market,
compared with just around 10% in 2006, making this the area the fastest growing sector.
Exhibit 19: Corporate sector issuance has been growingHistorical issuance (RMB tn)
Exhibit 20: Treasury and financial bonds still account for
59% of the bond market Breakdown of bond market as of Aug 2015
Note: Corporate sector bonds include Enterprise Bonds, Corporate Bonds, MTN, CP, PPN, Govt Supported Entity Bonds, and Convertibles.
Source: Wind.
Note: Corporate sector bonds includes Enterprise Bonds, Corporate Bonds, MTN, CP, PPN, Govt Supported Entity Bonds, and Convertibles.
Source: Wind, Goldman Sachs Global Investment Research.
0
2
4
6
8
10
12
06 07 08 09 10 11 12 13 14 Jan-Aug2015
Other
Corporate Sector Bond
Financial bond
TreasuryTreasury
25%
Municipal7%
Financial Bond34%
Corporate Sector Bond33%
Other 1%
September 21, 2015 China
Goldman Sachs Global Investment Research 24
Box 1: Regulating the China bond market
There are two layers of regulations regarding the China bond market – by markets, and by types of products. A large
number of regulators are involved, adding to the complexity of the market. This reflects the piecemeal developments
that have taken place over the past decade, as regulators introduced different products to address various financing
requirements and the changing investment needs of bond investors.
Regulating the trading of China bonds
There are three channels for China domestic bonds to be traded – in the interbank market, on the stock exchanges, and
OTC – and each have their own set of restrictions, as not all products can be traded through all three channels. Below
are brief descriptions of each market, using data from Chinabond (which we estimate aggregates to around 80% of all
bonds outstanding in China) as at the end of August 2015.
Interbank Market – around 93% of the bonds are registered under the interbank bond market. These are bonds that
are traded between banks, and with banks being the largest holders of China domestic bonds, the trading volume in
this market is far higher than for the other markets. Regulations were relaxed in July this year, with the PBOC
allowing foreign central banks, supranationals and sovereign wealth funds to access the interbank market. A wide
range of products can be traded in the interbank market including government bonds, central bank bonds, policy
bank bonds, financial bonds, enterprise bonds, MTN and commercial paper.
Exchange traded market – around 4% of the bonds are registered under the exchange traded market, and the
major participants in the exchange traded markets are non-bank financial institutions. The products that can be
traded in this market include government bonds, enterprise bonds, MTN and corporate bonds.
Over-the-counter (OTC) – around 3% of bonds outstanding are registered as under the OTC market. The OTC
market allows banks to trade bonds directly with non-bank investors. Initially trading in the OTC market was
restricted to government bonds, but over the past 18 months, this was expanded to include policy bank bonds and
enterprise bonds.
Regulating the issuance of China bonds
In addition, there are a number of regulators regulating the different types of financial products that are currently
available (see Exhibit 21). Depending on which product an issuer is seeking to bring to the market, they may require
approval from more than one regulator.
Exhibit 21: Regulators of the China bond market
Source: Chinabond
Regulator
PBOC
CSRC
PBOC
Regulator
PBOC, MOF, CSRC
PBOC
Policy Bank Bond, Special Financial Bond PBOC
Commercial Bank Bond, Non-Bank Financial Institution Bond CBRC, PBOC
Securities Firm Bond, Securities Firm Commercial Paper PBOC, CSRC
NAFMII
CBRC, PBOC
NDRC,PBOC,CSRC
PBOC, MOF, NDRC, CSRC
PBOC, CSRC
CSRC
Stock Exchanges
OTC Market
Exchange Bond Market
Interbank Bond Market
Market Type
Bond type
Convertible Bond
Listed Corporate Bond
Privately Placed Small and Medium Enterprise Note
Government Bond
Central Bank Bond
Financial Bond
Commercial Paper, Medium Term Note, Private Placement Note
Asset Backed Securities
Enterprise Bond
International Institution Bond
September 21, 2015 China
Goldman Sachs Global Investment Research 25
Maturity profile marginally shortened as corporate issuance rose
Through the course of these developments in the bond market, the average maturity
profile of bond issuance has fallen. In 2006, the weighted average maturity for new bonds
issued was 5.3 years, and this has shortened to 4.3 years in 2014. A closer look at each
segment shows the average maturity for Treasury bonds issued in 2006 was 5.0 years, and
this has lengthened to 7.5 years for Treasury bonds issued in 2014. This was more than
offset though by the shortening of maturity in the financial and corporate sectors. The
average maturity for newly issued financial bonds decreased from 6.0 years in 2006 to 4.3
years in 2014, and for corporate sector bonds from 4.4 years to 3.3 years. The maturity
shortening in the corporate sector was driven by a combination of the introduction of
shorter-dated instruments and the shortening of maturity for enterprise and government
supported bonds, and the prevalence of very short-dated CP and SCP issuance. As we shall
we in the later sections, the buyers for onshore bonds are still dominated by banks, which
we believe have a preference for shorter-duration assets. We think that for average
duration to increase, we need to see a broader based set of institutional investors, such as
pension and insurance funds, to participate in the market.
Exhibit 22: Average maturity decreased since 2006, driven by financial and corporate
sector bonds Average maturity (years) weighted by issuance amount
Source: Wind, Goldman Sachs Global Investment Research.
Offshore bond issuance still relatively small despite rapid growth
The rapid increase in domestic debt issuance has taken place alongside a similarly rapid
increase in offshore debt issuance. As Exhibit 23 shows, prior to 2010 the volume of
offshore debts issued by Chinese entities was minimal, but there has since been a notable
increase. The fastest growth came from the issuance of G3 currency bonds by Chinese
entities, with USD 76bn of new issuance in the first eight months of 2015, becoming the
largest source of G3 currency bond issuers in Asia. Second, the introduction of CNH bonds
has provided an additional avenue for Chinese issuers to borrow in the international bond
market. A combination of factors has driven the strong increase in offshore issuance in the
last few years. It offers Chinese companies a more diversified source of funding, and ability
to access the global saving pool; domestic bonds have relatively short maturity profiles,
and issuing offshore allows corporates to extend the duration of their borrowings; and the
offshore market has a much more developed high yield market, enabling higher risk
companies to issue bonds.
0
2
4
6
8
10
12
14
16
18
CP ABS PPN Corp. FinancialBond
MTN Muni Enterp.Bond
Treas. Gov .supported
200620142006 average2014 average
2006: 5.3 yr
2014: 4.3 yr
September 21, 2015 China
Goldman Sachs Global Investment Research 26
It is worth noting that, despite the rapid growth, the size of the offshore bond market is still
relatively small. With around USD390bn of offshore bonds outstanding, this is only around
6% of the USD6.3tn-equivalent outstanding in the domestic bond market. But the strong
growth in offshore bond issuance indicates the broader financing needs from private
enterprises, and emphasizes opportunity for the domestic bond market to further open up.
Exhibit 23: Offshore issuance seen notable pickup since
2010 China historical issuance in the offshore bond market as of
Aug 2015 (USD bn or equivalent)
Exhibit 24: Breakdown of China offshore bond markets as
of Aug 2015
Source: Bloomberg, Goldman Sachs Global Investment Research.
Source: Bloomberg, Goldman Sachs Global Investment Research.
76
20
0
20
40
60
80
100
120
140
160
180
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
Offshore CNY bond
G3 currency bond
HY, $91bn, 23%
IG, $229bn, 59%
Soveregin, $1bn, 0%
Financials, $48bn, 13%
Corporates, $21bn, 5% 05
Offshore CNY
Offshore CNY
G3 Currency
September 21, 2015 China
Goldman Sachs Global Investment Research 27
Part Seven – Government related bonds the bulk of the market
Despite the rapid increase of corporate bond issuance, China’s bond market remains
dominated by bonds issued by government related entities. Treasury bonds, municipal
bonds, and policy bank financial bonds in aggregate represented Rmb23tn of outstanding
bonds at the end of Aug 2015, or 58% of the market. In addition, bonds issued by SOEs
(which are corporates and commercial banks with significant government ownership)
account for 24% of the market and local government funding vehicles (LGFV) are another
11%. Therefore in aggregate, government related issuers account for 94% of the bond
market – meaning that only 6% of the entire China bond market is from private enterprises.
We expect government related bonds will continue to be a dominant feature of China’s
bond market, providing an important funding channel for the both the central and local
governments.
Exhibit 25: Public sector issuance accounts for 58% of total bonds outstanding; 94% if we
include SOEs and LGFVs as public sector Bond market issuance by private and public sectors, Aug 2015 (%)
Source: Wind, Goldman Sachs Global Investment Research.
MOF and policy bank bonds form the backbone of the bond market
Central government (or MOF) bonds and policy bank financial (PBF) bonds are the two
most important segments of China’s bond market. Given the volume, liquidity and
relatively strong credit profile of these bonds, their yields are often regarded as the
benchmark in pricing corporate bond issues.
The increase in MOF bonds has been largely driven by (on-budget) fiscal deficits. We
believe the ongoing urbanization drive and social safety net reinforcement would imply
continued strong demand for fiscal resources, thus a steady supply of MOF bonds, in the
years to come.
Treasury, 25%
Municipal, 7%
Policy Bank, 26%
LGFV Bond, 11%Commercial
Bank and other financials (SOE),
6%
Non-LGFV Corporates (SOE), 19%
ABS, 1% Non-LGFV Corporates(Private Enterprises), 3%
Commercial Bank and other
financials(non SOE), 2%
Public Sector
State-owned Borrowers
Private Sector
September 21, 2015 China
Goldman Sachs Global Investment Research 28
PBF bonds have also increased rapidly, with the outstanding stock expanding by an
average of roughly 20% per year in the last five years. This partly reflects the major role of
policy banks in supporting the implementation of important policy plans. For instance, last
year the State Council tasked the China Development Bank to set up a specialized unit to
arrange financing for urban redevelopment and social housing construction. Going forward,
we expect policy banks to continue to be a key financial intermediary channeling funding
sourced from the bond market towards various policy-priority areas.
LGFV bonds have risen rapidly…
LGFVs were the main vehicles for local government borrowing. Whilst central
government has the ability to fund through the issuance of MOF bonds, local governments
in China had, until recently, been restricted from borrowing. This was problematic for local
governments, as they were tasked with carrying out much of the country’s fiscal spending
post the onset of the Global Financial Crisis, and funding was a constraint given their
inability to borrow. To get around this, the local governments set up local government
funding vehicles, or LGFVs. These are companies wholly-owned by the local government,
and are vehicles that can borrow money and invest on behalf of the local governments.
The LGFV bonds are not formally guaranteed by the local governments, and such debts are
not included as part of local government budgets. Buyers of LGFV bonds and the domestic
credit rating agencies rely on implicit local government support to provide the credit
support for these entities.
And they have become a large “corporate” bond issuer. Local governments had relied
heavily on LGFV borrowing in recent years, and we estimated total LGFV debts outstanding
amounted to over Rmb 21.5tn or 34% of GDP at the end of last year. While most of such
borrowing was done through bank loans, a significant portion of the funding came through
LGFV bond issuance. In fact, annual LGFV bond issuance represented over 1/3rd of total
corporate sector issuance in 2014 (Exhibit 26). We estimate that there is Rmb 4.5tn of LGFV
bond outstanding at the end of Aug 2015, or 11% of the bond market.
Exhibit 26: LGFV bond issuance risen sharply in recent years LGFV issuance as % of total corporate sector issuance 2008-Aug 2015
Source: Wind.
35%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2008 2009 2010 2011 2012 2013 2014 Jan-Aug2015
September 21, 2015 China
Goldman Sachs Global Investment Research 29
… but shift to municipal bonds to help lower financing costs
Beijing pushing for a new fiscal regime; municipal bonds to play a key funding role.
The use of LGFVs created a number of challenges. There is moral hazard risk given the
LGFVs’ reliance on implicit government support, and as LGFV debt is not part of local
government budgeting, this introduced a layer of opacity to government financials. To
address this, policymakers have introduced various measures. In May last year, the
Ministry of Finance introduced a local government bond pilot program, allowing ten
provinces/cities to issue municipal bonds. This was followed by a new budget law passed
in August 2014 and a State Council guidance on local debt management in October 2014
(Article 43). These provided a broad basis for provincial-level local governments to issue
municipal bonds to finance part of their infrastructure investment. The outline of the
October guidelines is shown on page 31, and these guidelines require, among other things,
that local governments should raise debt in a prudent manner under pre-approved quotas,
and must no longer conduct financings through LGFVs to fund new government projects
(although some LGFVs continue to operate to invest in more commercially viable projects).
The main aim is therefore to shift local government financing towards the municipal bond
market, and this has the advantage of lowering local governments’ funding costs, as well
as bringing such borrowings “on balance sheet” and become part of local government
budgets.
Two types of municipal bonds have been formulated: general municipal bonds and
specialized municipal bonds. The former is intended to fund low-returns projects with
limited cash flows, and the local governments are expected to use general fiscal resources
to pay interest and repay the principal. The specialized municipal bonds, on the other hand,
are explicitly backed by the underlying projects that are expected to generate sufficient
returns and cash flows to meet the debt obligations. In terms of the scale of issuance, the
central government had initially announced a quota of RMB 1tn for the “debt swap”—
using the proceeds from municipal bonds to repay part of the maturing LGFV debt; and
another RMB 600bn to finance new flow of local government investment.
The municipal bond program is off to an encouraging start despite initial worries. The
nation-wide municipal bond program had been initially delayed because of concerns that
such large issuance could lead to significant bond market indigestion. However, thanks to
the PBOC’s supportive monetary stance and Beijing’s administrative facilitation (notably
permission for some of the municipal bonds to be privately placed instead of openly
auctioned), provincial level local governments have successfully issued first batches of
municipal bonds, generally at yields fairly close to those on central government bonds10.
Given the positive outcome, the central government has twice increased the debt swap
quota to RMB 3.2tn for this year, from an initial RMB 1 tn.
LGFV bond issuance channel will likely stay open
Despite the central government’s intention to curb LGFV issuance, they have so far allowed
some leeway for LGFVs to continue borrowing, including through the bond market, and
rolling over debt in order to ease the transition to the new fiscal regime. This can be seen
from the new issuance pattern for LGFV bonds. There was a notable drop off in the volume
of LGFV bond issuance following the announcement of Article 43 in October 2014, though
monthly issuance has picked up from March this year (see Exhibit 27).
We think the pickup in LGFV issuance in recent months reflects a slightly looser policy
stance to ensure that local governments are sufficiently well funded. Looking at the use of
10 In recent weeks, those municipal bonds auctioned in open markets have been issued at yields about 30bp above those of central government bonds.
September 21, 2015 China
Goldman Sachs Global Investment Research 30
proceeds, of the approximately RMB 654bn of LGFV bond issuance between March and
Aug this year, we estimate around 50% were used for refinancing existing debt (particularly
bank loans) (see Exhibit 28). This suggests that bond issuance remains an important
channel for LGFVs to roll over their debt, given that the municipal bond program and the
“debt swap” discussed above are still at early stages. For this reason, we think the LGFV
bond channel will remain open in the near term to contain any widespread refinancing
risks, and until there is more substantial progress in growing the municipal bond market
and other funding models such as PPP.
Exhibit 27: LGFV bond issuance tapered off after Article
43 while municipal bonds have risen. Monthly LGFV and municipal bond issuance (RMB bn)
Exhibit 28: Refinancing accounted for around 50% of Mar-
Aug’15 issuance amount Breakdown of Mar-Aug’15 LGFV bond issuance amount by
use of proceeds
Note: For bond proceeds with multiple usages, we identify the main usage by amount for the calculation.
Source: Wind.
Source: Wind, Goldman Sachs Global Investment Research.
0
100
200
300
400
500
600
700
800
900
Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15
LGFV bond issuance
Municipal bond issuance Article 43(October 2014)
Other0.4%
Use of proceeds info not
available20%
Refinancing existing
debt52%
Specific project use
15%
Working capital needs and general
corporate use13%
September 21, 2015 China
Goldman Sachs Global Investment Research 31
Box 2: LGFV draft rule:
A positive step towards addressing moral hazard issues
Moral hazard, namely the implicit support by central and local governments on different types of debt issued by state-
related entities, is in our view a key impediment to the development of a more market based pricing of credit. A
noticeable development came in October 2014, when China’s State Council announced new guidelines (“Article 43”) to
strengthen the supervision and management of local government borrowings. It states that the local government
should not be responsible for repaying debts of enterprises, and in turn, local governments should be responsible for
their own debt obligations, i.e. they should not expect a rescue from the Central Government when facing difficulties in
debt repayment.
The key provisions under Article 43 include:
Local governments should raise debt in a prudent manner under pre-approved quota approved by the State Council
Funds raised from debt issuance can be used to fund non-profit public services and pay off existing debt, but
cannot be used to fund regular operational expenses
Local governments may no longer borrow money through LGFVs or other corporate channels
Local governments are responsible for their own debt obligations and should not expect a rescue from the Central
Government when facing difficulties in debt repayment
Local governments with trouble repaying the debts should reduce the size of construction projects, cut
administrative spending, sell existing assets, etc. to meet repayment obligations
Local governments must no longer conduct financings through LGFVs, though the guidelines do provide a number
of important caveats.
The key to its effectiveness depends on the pace of implementation – if firmly followed through, this could have a
negative impact by introducing too much credit risk over a short time frame, but if not strictly implemented, the
guidelines would lose efficacy. The evidence so far suggests that progress will be gradual, in line with our initial
assessment. For example:
1. A key concern with the guidelines was how maturing existing LGFV debt could be repaid. If LGFVs no longer benefit
from implicit government support, it is unclear if lenders will be willing to extend credit to these entities. To address
this problem, policymakers announced a debt swap program in early 2015, allowing local governments to issue
municipals to repay RMB 1tn of maturing LGFV debts. This has since been expanded twice and the size of the
program has reached RMB 3.2tn. This means that a “tail” scenario of significant LGFV debt defaults are unlikely, at
least in the near term.
2. The several months post the announcement of Article 43 saw a noticeable fall in LGFV bond issuance given the
uncertainties introduced by the new guidelines. But LGFV bond issuance has picked up in recent months. Although
local governments can no longer borrow via LGFVs for capital spending, these LGFVs can still issue debt if they
operate projects on a commercial basis and creditors are comfortable that the LGFVs can repay the debts. In
addition, even though local governments will not be able to repay newly incurred LGFVs debts, they can still
provide assistance to LGFVs via other means (for example if the LGFV still has legacy public sector projects). It is
with these reasons that LGFVs have been able to issue bonds in the USD market11.
Although the examples above indicate that changes are likely to take place at a gradual pace, they are positive steps in
the right direction. They improve the accountability of local government finances, help to define the responsibilities of
the central government, local government and enterprises on future indebtedness, and are a meaningful step towards
addressing moral hazard risks.
11 See “The risks in offshore LGFV debts and their support agreements” Asia Credit Line, April 23, 2015
September 21, 2015 China
Goldman Sachs Global Investment Research 32
Part Eight – Corporate sector bonds dominated by SOEs
China’s corporate bond market has been in existence for over 30 years, despite only
showing rapid growth since 2006. According to the China Securities Regulatory
Commission (CSRC), several enterprises began raising unregulated interest-bearing funds
in 1982, and by the end of 1986, these bonds reached more than USD 2.9bn in outstanding
amount. Regulation was introduced in 1987, with bond issuance subject to approval by the
PBoC, State Planning Commission (now known as the National Development and Reform
Commission, or NDRC) and the MoF, and an annual quota was set. This laid the foundation
for the Enterprise Bond market, with annual issuance of Enterprise Bonds reaching a peak
of USD 12.7bn in 1992. However, according to the CSRC, many issuers were unable to
repay the bonds and subsequently defaulted during the 1990s. The Enterprise Bond from
the early days carried bank guarantees, and the losses were carried by the banking sector,
but these events did lead to a long period of decline in issuance volume.
The decline in corporate bond market activity reversed course in 2005, with the
introduction of commercial paper and other new types of instruments in the subsequent
years. But despite the growth in the past decade, the corporate bond market remains
largely a state-related market. We estimated that around 94% of the outstanding corporate
bonds at the end of August 2015 were issued by LGFVs or SOEs. Therefore the bond
market developments have not been able to help finance the privately owned enterprises,
and this resulted in the rapid growth in the trust financing market, which was a much
easier channel for private enterprises to borrow from. We believe that a number of
developments will be required if the market is to become more open to privately owned
enterprises.
Exhibit 29: Corporate sector bonds have exhibited rapid growth Corporate sector bond notional outstanding (RMB tn)
Source: Wind.
A fragmented corporate bond market with three regulators
The oldest corporate bond market in China is the Enterprise Bond market. As discussed
above, this market was regulated by the NDRC, and saw little growth in the years leading
up to the mid-2000s. Part of the reason for the slow growth was the spate of defaults seen
during the 1990s, and also the regulatory burden – issuers needed regulatory approvals if
they are allowed to issue in the Enterprise Bond market, and this market has been largely
utilized by SOEs.
0
2
4
6
8
10
12
14
2006 2007 2008 2009 2010 2011 2012 2013 2014 Aug-15
China’s bond market has been largely inaccessible for private sector financing, forcing them to rely on trust loans
September 21, 2015 China
Goldman Sachs Global Investment Research 33
An important development took place in 2005, with the PBoC introducing the Commercial
Paper (CP) market, marking the beginning of a new era for China’s corporate bond
development. Unlike the Enterprise Bond market, CP issuers only need to go through a
registration process, without the need for regulatory approvals. In addition, non-state
owned entities were allowed to issue in the CP market. Although CPs are short dated with a
maturity of less than 1 year, the much reduced regulatory requirement led to their rapid
increase in issuance. The pace of growth accelerated in 2007, with the formation of the
National Associate of Financial Market Institutional Investors (NAFMII), a self-regulating
organization established by the PBoC which took over the oversight of the CP market. They
wasted little time in introducing new products, such as Medium Term Notes (MTN) in 2008
and more recently, Private Placement Notes (PPN) in 2011.
A third corporate bond market was introduced in 2007, with the establishment of the
Corporate Bond market. This market is regulated by the stock exchange regulator CSRC,
and allows for companies to issue bonds that are tradable on those exchanges. The growth
of this market has been less rapid than with the CP/MTN/PPN market, as bond issuers
needed CSRC approval for issuance. In addition the majority of bonds in China are traded
in the interbank market, rather than exchange traded, meaning that liquidity on exchange
traded bonds was relatively low. The details of the three regulators are shown in Exhibit 30.
Exhibit 30: Details of the three corporate sector bond regulators
Source: NDRC, CSRC, NAFMI.
Reduced regulatory burden led to significant growth in new
products
The introduction of CP by the PBoC in 2005 and the setting up of NAFMII in 2007 led to a
period of rapid growth and innovation in the corporate bond market. By the end of 2006,
the amount of CP outstanding has already overtaken the amount of Enterprise Bonds
outstanding, which has been in existence for far longer (see Exhibit 31). By Aug 2015,
products regulated by NAFMII accounted for 61% of the corporate bond market, with a total
amount outstanding of RMB 7.8tn (see Exhibit 32). This includes CP (maturity shorter than
NDRC CSRC NAFMII
General InformationFull Name National Development and Reform
CommissionChina Securities Regulatory Commission
National Association of Financial Market Institutional Investors
Overseen by State Council State Council PBoC
Founded in 1952 1992 2007
Macroeconomic policymaking Overseeing securities and futures market Promoting development in OTC market
Monitoring economic performance Regulating secuties issuance and trading Rulemaking and implementation
Guiding and promoting reformsSupervising exchanges and market participants
Protecting member interest
Approving construction projects Investigating violation of laws and regulations Educating members and mediating disputes
Role in bond market
Regulated marketEnterprise bond Corporate bond
Medium-term Notes, Commericial Paper, and Private Placement Notes
Directing issuance to support macro policy Supervising the trading of bonds Enforcing issuer information disclosure
Any other measures to ensure market health Any other measures to ensure market health Any other measures to ensure market health
Main Functions
Common Responsibilities
Additional Responsibilities
Enacting policies and rules regarding bond issuance
Supervising bond issuance (eligibility, pricing, etc.)
Ongoing monitoring of the bond market
September 21, 2015 China
Goldman Sachs Global Investment Research 34
1 year), Short-term Commercial Paper (maturity shorter than 270 days), MTNs (maturity
longer than 1 year but under 5 years) and PPNs (same maturity profile to MTNs but
requiring lower level of disclosure and more relaxed leverage requirements as these are
placed privately to institutional investors).
Exhibit 31: Not many instruments back in 2006 Breakdown of corporate sector bonds by type in 2006
Exhibit 32: New instruments have been invented Breakdown of corporate sector bonds by type as of Aug 2015
Source: Wind.
Source: Wind.
More credit risk has been introduced, albeit slowly
The introduction of new products, and allowing a more diverse range of bond issuers, has
meant that more credit risk has been introduced. Exhibit 18 shows the breakdown of the
credit ratings by bond issuers (and note that this chart excludes CP ratings, because CPs
are short dated instruments and hence follow different rating scales to longer dated bonds).
At the end of 2006 and similarly in 2007, nearly 90% of rated corporate sector bonds are
rated AAA, which is not surprising given that the bond market (excluding CPs) were
dominated by Enterprise Bonds, which are usually large SOEs and many of which carry
bank guarantees. The introduction of new financial instruments and a broadening of the
range of issuers led to a noticeable drop in the proportion of rated bonds at AAA, falling to
below 50% by 2012. But since 2012, the percentage has hovered around the 50% level,
indicating that more work needs to be done if the trend in introducing more credit risk is to
continue.
Enterprise bond, 41%
CP, 45%
Govt supported,
10%
Convertible, 4%
Enterprise bond, 23%
Corporate bond, 7%
MTN, 29%CP, 7%
SCP, 10%
PPN, 15%
Govt supported,
9%
Convertible, 0%
September 21, 2015 China
Goldman Sachs Global Investment Research 35
Exhibit 33: More credit risk has been introduced to the corporate bond market Breakdown of corporate sector issuance by rating (%)
Source: Wind.
Differentiation in credit spreads becoming more apparent
Although the market is heavily concentrated by issuers rated AA or above, we have seen a
marked divergence in the pricing of credit. As shown in Exhibit 34, there has been a
notable widening of credit spreads for bonds rated A+ or below, whilst spreads for bond
rated AA- or above have remained relatively stable. This is in line with our expectation of
more credit differentiation, a view we highlighted in our China credit conundrum piece in
July 2013 (see “China Credit Conundrum: Risks, paths and implications”, July 26, 2013). In
our view, this reflects the market’s concerns regarding riskier credits, despite the fact that
lower rated credits remain a relatively small part of the overall bond market. We think this
is also impacted by recent defaults. We saw the first corporate bond default in March 2014,
followed by a period of calm with little default news. But more recently, in April and May
2015, we saw three new cases of defaults, including the first SOE to default on their
onshore bond obligation (see “A 4th domestic corporate bond default in China; looking for
clues on resolution processes”, Asia Credit Trader, May 29, 2015).
93% 96%87%
73% 68%58%
49% 51% 46% 52%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD
AA- or below AA AA+ AAA
September 21, 2015 China
Goldman Sachs Global Investment Research 36
Exhibit 34: Increasing differentiation in spreads across ratings Credit spread by rating in bps
Source: Wind.
Market still dominated by SOEs
As mentioned previously, the bulk of the corporate sector issuance has come from
companies that are linked to the government, namely SOEs and LGFVs. We think there are
a couple of reasons for their prevalence:
1. Firstly, SOEs are some of the largest companies in China, with sizeable financing needs,
and therefore they are more likely to utilize the bond market to diversify their funding
sources. One can see this by looking at the biggest issuers, with all of the top 50
issuers last year being SOEs (see Exhibit 35).
2. Second, and perhaps more importantly, moral hazard remains a key issue in the China
credit markets, with creditors preferring to lend to companies that carry strong
“implicit” support by the government. This leads to distortion of the capital markets,
with larger, state-related entities “crowding out” smaller, privately-owned firms.
0
200
400
600
800
1000
1200
Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
AAA
AA+AA
AA-
A+
A
A-
BBB+
AAA-
September 21, 2015 China
Goldman Sachs Global Investment Research 37
Exhibit 35: The top 50 issuers in 2014 are all SOEs
Source: Wind.
….curbing of trust financings should open access to the bond
market for private enterprises
In our view, the lack of bond market access for private enterprises is one of the reasons
why there had been such a strong growth in the trust financing market in the last few years,
as the trust market was one of the few financing channels available in China for non-state
related entities. At the end of 1Q10, the amount of outstanding trust assets was Rmb2.4tn,
and this has since grown to Rmb15.9tn by the end of 2Q15. Over the same period, the
growth in the corporate bond market was notably lower, increasing from Rmb2.9tn to
Rmb12.5 tn (see Exhibit 36). However, since the middle of 2014, there has been a notable
fall in new trust financings, as policymakers tightened rules on originating such financings,
and in fact, net new trust financings (i.e. new issuance less maturing amounts) have
hovered around zero for the past twelve months. We believe that the bond market is a
channel that policymakers will seek to utilize to compensate for the reduction in trust
financings.
1 China Railway Corporation 15 210 Central SOE 9952 State Grid Corporation of China 9 70 Central SOE 20913 China Power Investment Corporation 20 68 Central SOE 1824 China Datang Corporation 14 67 Central SOE 1865 China Guodian Corporation 15 60 Central SOE 2136 Shenhua Group Corporation Limited 6 57 Central SOE 3257 Aluminum Corporation of China 14 52 Central SOE 2808 China Huadian Corporation 12 48 Central SOE 2129 Jiangsu CommunicationS Holding Company 19 47 Regional SOE 41
10 Shaanxi Coal and Chemical Industry Group Co.,Ltd. 15 46 Regional SOE 17711 China Southern Power Grid Co.,Ltd 9 45 Central SOE 47212 China National Building Material Company Limited 12 44 Central SOE 12413 China Shenhua Energy Company Limited 5 40 Central SOE 24814 COFCO Limited 8 39 Central SOE 25015 China Huaneng Group 11 38 Central SOE 29216 China United Network Communications Corporation Limited 5 35 Central SOE 28817 Aluminum Corporation of China Limited 12 35 Central SOE 14218 China Minmetals Corporation 12 33 Central SOE 31819 Huainan Mining (Group) Co.,Ltd. 14 33 Regional SOE 5720 Tianjin Infrastructure Construction & Investment (Group) Co.,Ltd 11 32 Regional SOE 1321 China Minmetals Corporation 11 31 Central SOE 32322 China Petroleum & Chemical Corporation 2 30 Central SOE 282623 GD Power Development Co.,Ltd. 12 29 Central SOE 6124 China Three Gorges Corporation 6 28 Central SOE 6325 Datang International Power Generation Co.,Ltd. 9 28 Central SOE 7026 China CNR Corporation Limited 13 27 Central SOE 10427 Metallurgical Corporation of China Ltd. 8 27 Central SOE 21628 Shandong Hi-Speed Group Co.,Ltd 13 26 Regional SOE 4429 Hunan Expressway Construction Development Corporation 14 23 Regional SOE 930 Huadian Power International Corporation Limited 8 23 Central SOE 6831 Huaneng Power International,Inc. 6 22 Central SOE 12532 China Communications Construction Company Limited 6 20 Central SOE 36733 Shandong Iron & Steel Group Co.,Ltd. 8 20 Regional SOE 11634 Beijing Infrastructure Investment Co.,Ltd. 8 20 Regional SOE 1135 Tianjin Binhai New Area Construction & Investment Group Co.,Ltd. 8 20 Regional SOE 736 Shaanxi Provincial Communication Construction Group 11 20 Regional SOE 937 China Telecom Corporation Limited 3 19 Central SOE 32738 Beijing State-Owned Capital Management Center 4 19 Regional SOE 66239 State Development & Investment Corporation 6 19 Central SOE 11340 Yangquan Coal Industry(Group) Co.,Ltd 14 19 Regional SOE 18141 China Yangtze Power Co., Ltd. 6 18 Central SOE 2742 Guangzhou Metro Corporation 7 18 Regional SOE 743 Hubei Provincial Communications Investment Co., Ltd. 8 18 Regional SOE 1344 Jiangxi Provincial Expressway Investment Group Co.,Ltd 16 18 Regional SOE 1145 Gansu Provincial Highway Aviation Tourism Investment Group Co.,Ltd. 9 17 Regional SOE 2146 Henan Expressway Management Co Ltd 8 16 Regional SOE 947 Bright Food (Group) Co., Ltd. 7 16 Regional SOE 12148 China Longyuan Power Group Corporation Limited 5 16 Central SOE 1849 China Merchants Group Ltd. 5 15 Central SOE 9350 China General Nuclear Power Corporation 6 15 Central SOE 45
2014 Revenue (RMB bn)
IssuerRankNo. of 2014 bond issues
SOE Status2014 Issuance
(RMB bn)
September 21, 2015 China
Goldman Sachs Global Investment Research 38
Exhibit 36: Growth of trust assets outpaced growth of corporate bond market Data in RMB tn
Source: Wind, China Trustee Association.
0
2
4
6
8
10
12
14
16
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2010 2011 2012 2013 2014 2015
Trust assets
Corporate bond notional outstanding
September 21, 2015 China
Goldman Sachs Global Investment Research 39
Disclosure Appendix
Reg AC
We, Kenneth Ho and Hao Tang, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject
company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to
the specific recommendations or views expressed in this report.
We, MK Tang and Maggie Wei, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been
influenced by considerations of the firm's business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Disclosures
Regulatory disclosures
Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of
coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking
revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their
households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE
Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in
the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any
access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman
Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and
other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part
or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to
the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at
http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this
research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at
the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company
specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for,
this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs
(Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs
(India) Securities Private Limited. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian
Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See
below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia)
L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as
defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as
defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the Russian
Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main
purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the
covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number:
198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their
own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as
retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction
with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by
Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from
Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available
at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with
Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho
69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms
Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.
Ratings, coverage groups and views and related definitions
Credit Research assigns ratings to designated on-the-run ("OTR") debt securities of issuing companies. Definitions of Ratings: OP = Outperform. We expect the total return to outperform the median total return for the analyst's coverage group over the next 6 months. IL = In-
September 21, 2015 China
Goldman Sachs Global Investment Research 40
Line. We expect the total return to perform in line with the median total return for the analyst's coverage group over the next 6 months. U = Underperform. We expect the total return to underperform the median total return for the analyst's coverage group over the next 6 months.
NR = Not Rated. The investment rating, if any, has been removed pursuant to Goldman Sachs policy when to Goldman Sachs is acting in an
advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. NC = Not Covered. Goldman
Sachs does not cover this company. RS = Rating Suspended. Goldman Sachs Research has suspended the investment rating for this credit,
because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an
investment rating. The previous investment rating is no longer in effect for this credit and should not be relied upon. CS = Coverage Suspended. Goldman Sachs has suspended coverage of this company. NA = Not Available or Not Applicable. The information is not available for
display or is not applicable.
Coverage views: The coverage view represents each analyst's or analyst team's investment outlook on his/her/their coverage group(s). The coverage
view will consist of one of the following designations: Attractive (A). The investment outlook over the following 6 months is favorable relative to the
coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 6 months is neutral relative to the
coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 6 months is unfavorable relative
to the coverage group's historical fundamentals and/or valuation.
Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs
Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in
Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs
New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in
the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in
the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;
Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.
General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal
trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks
and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do
not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in
the products mentioned that are inconsistent with the views expressed by analysts named in this report.
Any trading recommendation in this research relating to a security or multiple securities within an industry or sector is reflective of the investment
theme being discussed and is not a recommendation of any such security in isolation.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or
go to http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
© 2015 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.