China is using connectivity to build not just a larger bond market but also a more resilient financial hub

As China pursues its goal of becoming a financial powerhouse, integrating its bond markets is no longer simply a prerequisite for a unified national market. It now serves as a critical part of financial infrastructure, aimed at improving the transmission of macroeconomic policies and unlocking growth in emerging industries.

China’s bond market reached an outstanding size of 196.7 trillion yuan ($28.5 trillion) by the end of 2025. This market serves not merely as a capital reservoir for the real economy, but as a benchmark for risk-free interest rates and the crucial hub for monetary policy transmission.

Historically, however, the bond market has been plagued by a structural paradox: massive yet fragmented. In recent years, from dismantling the institutional barriers between the domestic interbank and exchange markets to deepening cross-border mechanisms such as Bond Connect and Swap Connect, two-way connectivity is fundamentally reshaping the micro-ecology and macro-efficiency of China’s bond market.

In the early days of the bond market’s development, commercial banks largely withdrew from the exchange market to ring-fence financial risks, giving rise to the interbank market. For a prolonged period, this parallel, segmented structure led to fragmented market liquidity and compromised pricing efficiency.

A breakthrough in domestic bond market connectivity came only in recent years. In 2019, regulators expanded the scope of banks eligible for spot transactions on the exchange. Subsequently, in January 2022, the Interim Measures for the Connectivity Business between the Interbank Bond Market and the Exchange-traded Bond Market were officially released, allowing investors to conduct cross-market trading via linked infrastructure. This move effectively dismantled information and trading barriers, boosting overall liquidity and smoothing out the transmission of monetary policy.

Concurrently, cross-border connectivity — underpinned by Bond Connect and Swap Connect — has constructed the main arteries for external opening-up. The launch of Northbound Trading in 2017 and Southbound Trading in 2021 established a two-way framework for cross-border bond investment, enabling overseas investors to access the Chinese mainland interbank bond market and allowing eligible mainland institutions to invest in Hong Kong’s bond market. Swap Connect, launched in 2023, extended this interconnectivity into the derivatives space. Data underscores the vitality of this process: In 2025, the total trading volume under the Northbound Bond Connect hit 9.7 trillion yuan, while Northbound Swap Connect transactions exceeded 530 billion yuan, attracting 87 overseas institutions to the market.

Continuous policy optimization has further burnished the appeal of renminbi-denominated bonds. For instance, in early 2026, authorities extended the tax exemption policy for foreign investment in the domestic bond market until the end of 2027. Swap Connect underwent several key upgrades in 2025, including extending the maximum remaining maturity for interest rate swap contracts to 30 years, introducing new contracts referencing the one-year Loan Prime Rate, and raising the daily net notional trading limit to 45 billion yuan. These measures have tangibly reduced trading costs for foreign investors and enriched their hedging toolkits.

Notably, the opening of the bond repurchase — or repo transactions — to overseas investors in September 2025 marked another substantive leap. For the first time, foreign institutions could use their renminbi bonds as collateral for financing, closing the loop on the “hold-finance-reinvest” cycle essential to mature portfolio management. Despite an early-stage cap limiting repo financing to 80 percent of holdings, the path is set: China is steadily assembling the toolkit of a mature market.

Despite remarkable achievements, when measured against the demands of high-quality development, domestic bond market connectivity must still venture into deeper waters, transitioning from mere “channel linkage” to authentic “rule integration”. In February 2026, the Shanghai municipal government work report also explicitly proposed promoting connectivity between the interbank and exchange bond markets.

The journey toward a unified national market remains only halfway complete. The core of the next step lies in reconciling the underlying regulatory differences between the interbank and exchange markets. This means unifying information disclosure standards for bond issuance, aligning rating systems to eliminate regulatory arbitrage and converging investor protection mechanisms. Only with unified rules can the long-standing problem of fragmented liquidity be resolved, to ensure that bond pricing truly reflects underlying credit risk rather than being dictated by the market segment in which it is traded. This will strengthen the price discovery function and guide capital toward more precise allocation across the macroeconomy.

On the cross-border front, China has been laying the highways of market connectivity over the past decade, building the infrastructure that enables capital to flow more freely. The 15th Five-Year Plan (2026-30) period will be pivotal in ensuring that the “traffic rules” are fully aligned with international standards.

This vision has been clearly articulated in recent high-level policy statements. The 2026 People’s Bank of China work conference explicitly proposed “deepening high-standard financial market opening-up” and emphasized optimizing the institutional arrangements for Bond Connect and Swap Connect. This is not an isolated mandate. It is closely connected to the dual strategic objectives of enhancing Shanghai and reinforcing Hong Kong’s status as leading international financial centers.

In the next phase of cross-border connectivity, the central theme will be deep integration. With the opening of the bond repo business, Chinese government bonds are transforming from passive “buy-and-hold assets” into active high-quality collateral. The key going forward is to promote the widespread recognition and substantive application of Chinese sovereign debt in global derivatives trading and central bank operations. The PBOC’s active exploration of expanding the acceptance of onshore bonds as eligible collateral is a step precisely in this direction. Making renminbi assets genuinely usable within the international financial architecture is the ultimate hallmark of their maturation into a major global reserve asset.

The era of extensive, volume-driven expansion in China’s bond market has drawn to a close. The age of precision integration has begun. Moving from constructing physical infrastructure to fostering institutional convergence and functional upgrades, China is not just using connectivity to build a larger market. It is shaping a more resilient financial hub. Looking ahead, China’s bond market will transcend its role as a mere destination for global capital, evolving into an indispensable pillar of the global financial architecture.

Wu Wenfeng is a professor of finance at the Antai College of Economics and Management and the director of the Division for Development Liberal Arts at Shanghai Jiao Tong University. Yang Bowen is a research fellow at Antai College of Economics and Management at Shanghai Jiao Tong University.

The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.