Li-Wen Lin

Curtis J. Milhaupt

University of British Columbia

Columbia University and ECGI

Bonded to the State : A Network Perspective on China’s Corporate Debt Market


A corporate bond market is thought to play an important role as a supplement to bankoriented financial systems in emerging markets – functioning in effect as a “spare tire.” Yet bond markets typically rely upon a formal institutional foundation that is often lacking in developing economies. China’s corporate bond market is huge, yet scholarly analysis of it is relatively scarce and some of its elements remain poorly understood. In this paper, we use a network perspective to explore the formation, operation and function of the Chinese corporate bond market. Our effort begins by unpacking the complexities of the market’s structure and formal regulation, which have been shaped by a surprising degree of regulatory competition among the three central government ministries overseeing the issuance and trading of corporate debt instruments. Next, we analyze China’s corporate bond market as a network of relationships – relationships that invariably lead back to the state – and explore the consequences of the state-centric network on the pricing, rating, and default of corporate bonds. The latter have been governed by informal norms protecting issuers from default, but these norms are under considerable stress. We label these norms TBTF (too big to fail); TCTF (too connected to fail), and TMTF (too many Chinese bondholders to fail) and illustrate their operation and limitations with recent examples. The paper concludes by highlighting some key policy issues raised by our analysis, including the consequences of regulatory competition, the potential role of the bankruptcy system in handling issuer financial distress, and the inter-linkages between the corporate bond market and China’s rapidly expanding shadow banking system.

 State centricity has helped the Chinese corporate bond market grow exponentially, from virtually nonexistent fifteen years ago to the third largest in the world today. But state centricity has resulted in an institutionally fragile market. Several consequences of the market’s development along this path, such as concentration of risk in state-linked financial intermediaries, expansion of credit to local state-owned enterprises, growth in the shadow banking system, and the informal resolution of bond defaults, may undermine the spare tire function. The Chinese corporate bond market thus well illustrates both the accomplishments and the limitations of state capitalism.


The emergence of a corporate bond market, sometimes analogized to a “spare tire,” plays an important role in the maturation of bank-dominated financial systems of developing economies. 

Corporate bond finance diversifies risk away from the banking sector and expands financing channels, particularly for small and medium-sized firms, which generally lack access to the capital markets and are usually not the primary recipients of bank loans. The corporate bond market also provides an alternative mechanism for monitoring corporate management and fosters practices essential to a robust financial system, such as a sound risk assessment culture and a reliable information disclosure regime. But creating a functional corporate bond market is difficult, because it requires a host of institutions that are usually underdeveloped or entirely lacking in a developing economy. These include credit rating agencies, a liquid trading market for debt, a robust regulatory regime, and reliable legal mechanisms for protecting bondholders in the event of an issuer’s default.

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