Access the Sina Finance app and search for "information disclosure" to view additional rating levels.◇ Authors: Huang Hui, Head of the Investment Management Department at Shenwan Hongyuan Group; Li Xiao, Head of Compliance and Risk Control at the Fixed Income, Currencies and Commodities (FICC) Division of Shenwan Hongyuan Securities; Liu Luxi, Macro Researcher at the Fixed Income, Currencies and Commodities (FICC) Division of Shenwan Hongyuan Securities; Zhou He, Student at the School of Mathematical Sciences, Nankai University.◇ This article was originally published in the September 2026 issue of Bond.

Abstract

As China's bond market expanded in scale, credit risk gradually became more visible. As risks were progressively cleared, defaults have shown a converging trend. Taking the phased evolution of bond defaults since 2014 as the main thread, this article analyzes the typical policy-driven characteristics displayed during the evolution of credit risk in China's bond market from four paths: macroeconomic and monetary policy, financial regulatory policy, industry adjustment policy, and debt resolution and institutional reform. On this basis, the article reviews the background, key points, and implementation effects of increasingly stringent bond trading regulatory policies during the process of credit risk release, and examines the effectiveness of risk release from the perspective of credit spread trends. The analysis shows that policy drivers are the dominant force behind the orderly release of credit risk in China's bond market, and after risk clearing the market has entered a phase of low credit spreads. Accordingly, the article puts forward policy recommendations for further improving bond market infrastructure from five aspects: rating effectiveness, the market-maker system and electronic trading platforms, penalties for default, default resolution mechanisms, and credit mitigation instruments.

Keywords

Bond market, credit risk, credit default, bond regulation, infrastructure

Since the first bond default in China's bond market in 2014, the credit risk that had long accumulated in the market has gradually been released and has now largely converged, with the pace and industry distribution of defaults showing clear policy-driven characteristics. This article examines the evolution of credit risk in stages and, based on the latest risk characteristics of the bond market, proposes recommendations for building multi-tiered bond market infrastructure.

Trends in the Evolution of Credit Risk in China's Bond Market

From 2014 to 2017, bond defaults moved from "zero" to isolated cases, and implicit guarantees were gradually broken. Wind data show that cumulative default scale was about 80.5 billion yuan, with industries concentrated in overcapacity sectors against the backdrop of supply-side structural reform. From 2018 to 2020, defaults became normalized. After the 2018 Guiding Opinions on Regulating Asset Management Business of Financial Institutions (hereinafter referred to as the "new asset management rules") was issued, rectification of tiered products and the transition to net asset value management advanced, and credit risk accumulated in asset management business was gradually released. Combined with financial deleveraging, entities with high credit ratings (AAA) began to default. From 2021 to 2023, some leading real estate developers defaulted one after another, and defaults in the real estate industry broke out in concentrated fashion. Since 2024, under the combined effect of a 10 trillion yuan local debt swap arrangement and a real estate policy package focused on "controlling increments and reducing inventory," credit risk in the bond market has gradually converged and the number of new defaulting entities has decreased.

Analysis of the Policy Drivers Behind the Evolution of Credit Risk

Policy drivers are crucial to the evolution of credit risk in China's bond market, and their driving mechanism can be broken down into four basic paths. First, macroeconomic and monetary policy affects the pace of risk exposure by adjusting the total volume and structure of the economy and the level of liquidity. Second, financial regulatory policies affect the manner and links of risk exposure by constraining the behavior of intermediaries in the financing system. Third, industry adjustment policies directly tighten or loosen the financing availability and demand of specific industries, affecting the industry distribution of credit risk. Fourth, debt resolution and institutional reform ultimately affect loss-sharing methods and the cost of risk resolution by substituting public credit for private credit and improving risk disposal rules. It should be noted that multiple types of policies often interweave in the same period, and stage divisions are not simply based on the timing of a single policy's introduction. This article divides periods according to the points at which default characteristics showed clear turning points: in 2018 defaults shifted from isolated cases to normalization, in 2021 defaults broke out in concentrated fashion in the real estate industry, and since 2024 the number of new defaulting entities has fallen sharply. The dominant policy refers to the category of policy with the greatest marginal impact on default characteristics in the current period and with a direct causal chain to defaulting entities: monetary policy determines the overall liquidity gate and affects the general pace of risk release; financial regulatory policy determines the room for off-balance-sheet leverage and maturity mismatches and affects the manner of risk exposure; industry adjustment policy determines cash flow in specific industries and affects the industry distribution of risk exposure; and debt resolution and institutional reform determine loss-sharing methods and affect the cost of risk resolution. On this basis, the dominant policy in each stage can be identified, and the true logic of risk evolution in China's bond market becomes clearer.

(1) Capacity-clearing defaults dominated by macroeconomic supply-side structural reform

The clearing of credit risk from 2014 to 2017 was driven at its core by the implementation of macroeconomic policy. The 2015 Central Economic Work Conference proposed the "three cuts, one reduction, one补" — advancing supply-side structural reform and reducing excess capacity, high inventory, and leverage in the real economy. Policy imposed production limits and environmental constraints on industries with severe overcapacity such as steel, coal, and nonferrous metals. Cash flow at related enterprises tightened, and some industry entities defaulted one after another. In 2015, the People's Bank of China cut interest rates five times and lowered reserve requirements in multiple rounds. Although the accommodative monetary environment delayed default exposure to some extent, it also pushed up the overall leverage level of the market, planting the seeds for the concentrated emergence of credit defaults in 2016-2017.

(2) Deleveraging defaults dominated by financial regulation

From 2018 to 2020, the main policy line shifted to financial regulation, with the core goal of making hidden risks visible. In April 2018, the new asset management rules took effect, breaking implicit guarantees, eliminating multi-layer nesting, and regulating maturity mismatches, directly cutting off off-balance-sheet non-standard financing on which weak-qualification entities relied heavily, and restructuring the transmission chain from banks to non-bank institutions to the real economy. After financing tightened, liquidity risk at highly leveraged private enterprises began to expose in concentrated fashion. Risk was no longer limited to traditional overcapacity industries but gradually spread to energy, pharmaceuticals, automobiles, aviation, semiconductors, and many other fields. Financial regulatory policy does not directly shrink aggregate volume; instead, it blocks specific financing channels, forcing risks originally hidden off balance sheet to become exposed. During the same period, the People's Bank of China used accommodative tools one after another to hedge. In December 2018, the People's Bank of China created the targeted medium-term lending facility (TMLF), in 2019 reform of the loan prime rate (LPR) was implemented, and in 2020 monetary policy became more accommodative under the impact of the pandemic. Even so, sustained liquidity easing could not reverse the deterioration in the fundamentals of highly leveraged entities. In November 2020, defaults by some AAA-rated entities drew market attention, policy set a tone of strictly investigating debt evasion, and the market clearly recognized for the first time that there are boundaries to implicit local government guarantees. In the same year, the share of default amount by state-owned enterprises increased noticeably. This stage can be regarded as a "repricing of implicit credit" under the main line of regulatory policy.

(3) Systemic real estate defaults dominated by industry adjustment

From 2021 to 2023, the main policy line shifted to industry adjustment. Compared with macroeconomic policy and financial regulation, industry adjustment policy has stronger penetrative power and more precise targeting, acting on specific industries from three ends: financing, supply, and demand. In August 2020, the "three red lines" constrained the growth rate of interest-bearing liabilities of real estate enterprises. In December 2020, concentration management for real estate loans restricted bank lending. In 2021, loan limits and price caps affected sales receipts. The combined force of the three policies interrupted the previous self-circulation of real estate enterprises based on high leverage and high turnover. A number of leading real estate enterprises defaulted one after another, and in 2022 real estate defaulting entities accounted for more than 60%. Policy shocks and liquidity shocks also amplified each other's negative effects in this stage. For example, in November 2022 a bond market adjustment triggered concentrated redemptions of wealth management products, pushing up credit bond spreads and making bond issuance more difficult for weak-qualification entities. From 2021 to 2023, the scale of bond extensions increased. However, industry adjustment has the characteristic of being "tightenable and loosenable." In November 2022, the People's Bank of China and the former China Banking and Insurance Regulatory Commission issued the Notice on Doing a Good Job in Current Financial Support for the Stable and Healthy Development of the Real Estate Market. Subsequently, financing support policies through the three channels of credit, bonds, and equity were implemented one after another, known in the market as the "three arrows" supporting real estate enterprise financing. As a result, industry risk gradually converged.

(4) Risk convergence dominated by debt resolution and institutional reform

Since 2024, the policy focus has shifted from short-term emergency risk disposal to advancing the resolution of existing debt and the building of long-term regulatory institutions. In November 2024, a package of local debt resolution plans was implemented, with the core idea of using public credit to replace private credit: by increasing the local government debt ceiling by 6 trillion yuan to replace existing hidden debt and arranging 80 billion yuan each year for five consecutive years from new special bonds for debt resolution, directly adding a total of 10 trillion yuan in local debt resolution resources. By lowering interest rates, extending debt maturities, and promoting the visibleization of hidden debt, this replaced existing high-interest debt and non-standard liabilities of weak-qualification urban investment platforms, effectively reducing tail default risk for urban investment issuers. After the policy was implemented, the marginal default rate gradually fell to a historical low, and the default rate of state-owned enterprises moved even closer to zero. At the same time, the registration system was fully implemented for bond issuance, and investor protection systems such as default restructuring, bond swaps, and trustee management were continuously improved. In the future, urban investment risk may show a pattern of "regional divergence": high-risk regions will have policy support at the bottom, with marginal risk easing; but some weak-qualification platforms lacking support from operating cash flow will continue to face pressure. The market will increasingly focus on issuers' own ability to generate cash, and government credit, shareholder credit, and corporate entity credit will gradually decouple.

Tighter Bond Market Trading Regulation During the Release of Credit Risk

(1) Background of the introduction of bond trading regulatory policies

As credit risk in the bond market became more visible, some market participants, in order to avoid exposing credit risk on their own books, attempted to use irregular trading methods to transfer or hide risk. To regulate bond trading behavior and prevent risk from accumulating within the system, regulatory institutions and self-regulatory organizations such as the People's Bank of China and the China Securities Regulatory Commission issued policies one after another to crack down on bond market trading violations.

(2) Review and key points of major regulatory policies

In December 2017, the Notice on Further Strengthening Regulation of Bond Trading by Securities and Fund Management Institutions was released, strengthening compliance management requirements for bond trading. In January 2018, the People's Bank of China and other authorities jointly issued the Notice on Regulating Bond Trading Business of Bond Market Participants. In 2018, related policies were issued one after another. Among them, the Internal Control Guidelines for Bond Investment and Trading Business of Securities and Fund Management Institutions, as internal control standards for bond investment and trading business of securities and fund management institutions, made detailed provisions on authorization management, personnel management, business segregation, internal control systems, price inquiry management, risk management, and bond library management for bond investment and trading. Thereafter, the regulatory framework continued to improve, and policy supply continued to extend. In December 2019, four departments including the People's Bank of China jointly issued the Interim Measures for the Administration of the Credit Rating Industry, unifying regulatory standards for the credit rating industry and regulating rating behavior from the institutional source. In July 2020, the People's Bank of China, the National Development and Reform Commission, and the China Securities Regulatory Commission jointly issued the Notice on Matters Concerning Default Disposal of Corporate Credit Bonds, clarifying the basic principles and procedural arrangements for default disposal. In December 2020, the same three departments jointly issued the Measures for the Administration of Information Disclosure of Corporate Credit Bonds, unifying information disclosure requirements for corporate credit bonds. In August 2021, six departments including the People's Bank of China jointly issued the Guiding Opinions on Promoting Reform, Opening Up, and High-Quality Development of the Corporate Credit Bond Market, further clarifying market access, trading mechanisms, and investor protection requirements. Since 2022, exchanges and the National Association of Financial Market Institutional Investors have successively strengthened self-regulatory rules on abnormal trading monitoring and structured bond issuance governance, and have continued to impose self-regulatory sanctions for bond trading violations. In 2024, the National Association of Financial Market Institutional Investors launched self-regulatory investigations and imposed sanctions on four rural commercial banks for violations in secondary market trading of government bonds, expanding the coverage of regulatory enforcement from securities and fund management institutions to bank-type participants. In April 2026, the National Interbank Funding Center issued the National Interbank Market Bond Trading Rules, integrating and unifying the interbank market bond trading rule system. At this point, bond trading regulation gradually extended from front-end compliance requirements to full-chain monitoring of trading behavior.

(3) Assessment of the implementation effects of regulatory policies

Since 2019, the number of regulatory penalty cases in the bond market has increased, mainly concentrated in three aspects: trading behavior, internal control management, and system construction. Cases in investment and trading mainly focused on illegal off-balance-sheet holding, benefit transfer, conflicts of interest caused by improper related-party transactions, abnormal trading, and assisting structured issuance. Cases in internal control management mainly focused on inadequate prevention of conflicts of interest, inadequate management of price inquiries and bond white lists, and incomplete personnel qualification and compensation management. Cases in system construction mainly focused on failure to realize system approval and indicator monitoring functions, as well as inadequate system data and authority management. Over time, the characteristics of violation cases have also changed to some extent. In cases from 2023 and earlier, there were situations of buying and selling defaulted bonds or high-risk bonds through related-party transactions or non-fair prices to hide risk. Since 2024, more cases have involved influencing prices through methods such as using concentrated capital advantages to conduct continuous buying and selling or self-dealing. The evolution of these violation characteristics has clear policy implications: channels for hiding credit risk through irregular trading have been effectively blocked, and violations have shifted more toward price-level manipulation, directly exposed to regulatory monitoring. From representative sanction cases, the National Association of Financial Market Institutional Investors has continued to impose self-regulatory sanctions for bond trading violations, with targets expanding from securities and fund management institutions to bank-type participants, and the depth and coverage of regulatory enforcement have continued to expand. As the institutional framework improves and penalty decisions are gradually implemented, the effects of trading regulatory policy continue to appear and corroborate the overall trend of credit risk convergence in the bond market.

After Policy Helps Release Risk, the Market Enters a Low Credit Spread Environment

Since 2014, bond credit risk has gradually been released and entered a convergence stage under policy drivers and standardized trading regulation. As shown in Figures 1-3, since 2025 credit spreads on AAA and AA- corporate bonds and real estate bonds have all trended downward. It should be noted that spread narrowing may also stem from factors other than credit risk release: first, against the background of an "asset shortage," the supply of high-yield assets continues to converge, forcing investors to compress risk premium requirements; second, supply-demand mismatch, as debt resolution and real estate risk prevention policies reduce the supply of new high-risk bonds while institutional allocation demand remains strong, and under-allocation pressure suppresses spreads; third, liquidity easing, as falling funding rates lower the opportunity cost of holding credit bonds. These alternative explanations cannot be completely ruled out, but three pieces of evidence support the dominant role of risk release: first, spread declines are accompanied by simultaneous declines in default rates, extension rates, and the frequency of rating downgrades, reflecting improvement in issuer fundamentals rather than mere funding conditions; second, if spread narrowing were mainly driven by an "asset shortage," high-grade spreads should compress first while low-grade spreads remain relatively firm, meaning rating spreads should widen, but in reality spreads have generally declined across ratings, and spreads in the real estate and urban investment sectors, where defaults were previously frequent, have narrowed even more, consistent with the industry path of risk release; third, the pace of spread convergence closely matches policy timing such as debt resolution and real estate risk resolution, and liquidity changes cannot explain this structural and timing correspondence. Therefore, it can be considered that the current low credit spread environment is the result of the superposition of three factors: credit risk release, changes in supply-demand structure, and liquidity easing. Specifically, from 2014 to 2017 defaults were isolated, and corporate bond credit spreads generally showed a volatile downward trend; from 2018 to 2020, the implementation of financial regulatory policies such as the new asset management rules pushed defaults toward normalization, and corporate bond credit spreads remained high; from 2021 to 2023 industry adjustment triggered concentrated real estate defaults, and real estate bond spreads fluctuated sharply; starting in 2024, the market gradually entered the stage of debt resolution and institutional reform, and credit spreads on corporate bonds, real estate bonds, and urban investment bonds all fell to relatively low levels, reflecting from the spread perspective the results of credit risk release in recent years.

Policy Recommendations for Improving Bond Market Institutions

Although after the orderly release of credit risk the market has entered a phased low credit spread environment, the bond market system still has the following prominent problems: first, rating differentiation is insufficient, with domestic ratings highly concentrated in the AA to AAA range and rating downgrades lagging, making it difficult for investors to rely on external ratings for layered credit risk pricing in a low-spread environment; second, price discovery efficiency in the trading mechanism is relatively low, and under a price-inquiry-dominated model information asymmetry and transaction costs are high, while some irregular trading chains are long and concealed, weakening the pricing function of the secondary market for credit risk; third, penalties for malicious default, fraudulent issuance, and similar behavior lack sufficient deterrence, the cost of illegality for issuers and intermediaries is relatively low, and the credit constraint mechanism is not yet sound; fourth, default disposal costs are relatively high, disposal cycles are long, and information is not transparent, so actual investor recovery rates need to be improved; fifth, the depth of credit mitigation instruments is insufficient, participants are homogeneous, and secondary market trading is lacking, leaving investors without tools to manage and trade credit risk in a market-based way. In response to these problems, in order to continuously consolidate the institutional foundation of the bond market, better respond to potential risks brought by dynamic changes in the credit environment, and maintain the long-term stable operation of the bond market, this article puts forward recommendations for improving bond market infrastructure from the following five aspects.

(1) Recommendations for advancing the effectiveness of rating agencies

In response to insufficient rating differentiation, efforts should be made to advance the effectiveness of rating agencies. As systemic credit risk is released and converges, the bond market is in a healthy "narrow spread" environment, and the credit qualifications of micro entities should in theory be transmitted more effectively into spread changes and credit risk rankings, making the effectiveness building of rating agencies particularly critical. At present, domestic ratings are highly concentrated in the AA to AAA range, and on average ratings are downgraded only 3-6 months before default, so the credit risk differentiation and early warning functions of external ratings are insufficient. It is recommended to introduce a mandatory distribution mechanism to raise the proportion of investment-grade credit ratings (BBB) and below among low-rated entities to a reasonable level. At the same time, it is recommended to learn from the experience of international rating agencies, establish a pre-default warning watchlist system, and appropriately increase the weight of quantitative models, ultimately improving the effectiveness of external ratings.

(2) Improve the bond market-maker system and fully promote electronic trading platforms to enhance price discovery efficiency and liquidity in the bond market

In response to the relatively low price discovery efficiency of the trading mechanism, the market-maker system should be improved and electronic trading platforms should be promoted. At present, China's bond market trading mechanism is dominated by interbank price inquiry trading, which suffers from insufficient price discovery efficiency and insufficient liquidity, and also causes some trading violations to have long chains, be concealed, and be difficult to identify. On the one hand, it is recommended to strengthen incentives for market makers, encourage them to improve support capabilities in financial technology, stimulate the enthusiasm of bond market makers, and grant market makers more rights to encourage them to better fulfill market-making obligations, such as providing convenience in financing and securities lending, granting trading fee discounts, and treating market-making performance as a bonus item in securities firms' applications for other qualifications, while also setting reasonable market-maker assessment and incentive-constraint mechanisms. On the other hand, it is recommended to fully promote electronic trading platforms such as anonymous click trading (X-Bond), and through mechanisms of standardized quotation, anonymous matching, and automatic execution, effectively solve the pain points of information asymmetry and high transaction costs under the traditional price inquiry model.

(3) Increase penalties for illegal acts such as malicious default by issuers and fraudulent issuance by intermediaries

In response to insufficient deterrence for malicious default and fraudulent issuance, it is recommended to impose heavy penalties on issuers that commit financial fraud or fraudulent issuance during the underwriting and issuance stage, strictly constrain the actual controllers of defaulting enterprises legally, increase penalties, and pursue criminal liability in serious cases; and impose heavy penalties on lead underwriters and rating agencies that fail in their duties during the issuance stage. It is recommended to strictly constrain debt evasion and malicious default through laws and departmental rules; require rating agencies' ratings to be fair and stable, and eliminate behavior that disrupts the market by grabbing market share with high ratings and then abruptly downgrading after the fact. It is necessary to enhance deterrence at the legislative level, clarify punitive measures for illegal acts at the operational level, and strengthen market confidence in building a sound financial ecosystem and credit environment.

(4) Improve supporting mechanisms for bond default disposal

The bond default disposal system is an important part of the institutional system of the credit bond market. After implicit guarantees are gradually broken, remedies such as bond investors filing lawsuits and applying for bankruptcy will become the main channel for law-based default disposal. In response to the relatively high cost of default disposal, supporting mechanisms should be improved. At present, default disposal cycles are too long and investor information asymmetry is prominent. It is recommended to improve the practical operating efficiency of judicial channels through specialized institutions such as financial courts, clarify the timing and procedural requirements of each link in default disposal, compress disposal cycles, and effectively protect investor interests. At the same time, it is recommended to establish a specialized authoritative organization to supervise the asset disposal and debt restructuring process of defaulted enterprises and prevent enterprises from privately transferring assets or maliciously evading debt.

(5) Vigorously develop credit mitigation instruments to enhance the feasibility and effectiveness of investors managing and trading risk

In response to insufficient depth in credit mitigation instruments, they should be vigorously developed to provide instrument support for market-based trading of credit risk. On the one hand, high-risk, high-yield assets can be combined with credit mitigation instruments to strip out part of the risk and return, expanding the investor base; on the other hand, credit mitigation instruments in effect provide liquidity for "risk" and give investors a means to manage and trade risk. The essence of trading credit mitigation instruments is to obtain returns brought by changes in the credit spreads of credit entities. Drawing on overseas experience, feasible trading strategies include directional arbitrage, spread arbitrage, relative basis change arbitrage, roll-down arbitrage, and cross-border arbitrage, among others. At present, domestically, on the one hand, market environment factors such as homogeneous participants, lack of secondary market trading, insufficient accumulation of default data, and low default probability of underlying entities affect development; on the other hand, the existing regulatory environment imposes relatively strict restrictions on credit derivatives such as credit risk mitigation warrants (CRMW), making diversified operational strategies difficult to implement in practice. As sporadic credit bond defaults occur going forward, market demand for credit derivatives such as CRMW will become stronger, and the varieties, tenors, and rating systems of credit derivatives will gradually improve.

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