The People's Bank of China and China Securities Regulatory Commission recently issued a joint notice, agreeing to cooperate on infrastructure interconnectivity between the interbank bond market and the stock exchange bond market, in another step toward unifying the country's bond market.

The notice said that the PBOC and the CSRC will strengthen regulatory cooperation and coordination to jointly supervise and administer bond issuance, registration, trading, trusteeship, clearing and settlement through interconnectivity, which refers to the mechanism which qualified investors in the interbank and stock exchange bond markets will use to buy and sell bonds traded in the two markets.

For historical reasons, China's bond market is divided into the interbank market and the stock exchange market, and their different bond varieties are subject to the supervision of different authorities such as the central bank, the National Development and Reform Commission, the CSRC and the Ministry of Finance. However, there are differences in the yields and liquidity between the interbank market and the bourse market, because the two markets have different investment subjects. Given that the two markets are supervised by different departments, different parties have different judgments on bond risks, which usually leave arbitrage space in supervision and rating, thus affecting the transmission of the country's monetary policy and the effective implementation of macro-control measures, partially restricting bond liquidity, and possibly increasing the financing cost of bond issuers. No wonder there have been calls for unifying the two bond markets.

In 2018, the PBOC and the CSRC had jointly issued a document saying they will work with the National Association of Financial Market Institutional Investors to promote the gradual unification of business qualifications in the interbank bond market and the bourse bond market.

In August the same year, the Financial Stability and Development Committee under the State Council, China's Cabinet, for the first time called for the establishment of a bond market with unified management and coordinated development. In December the same year, the PBOC and other departments jointly issued a document, making it clear that the CSRC would carry out unified law enforcement against illegal acts in the two bond markets.

The Chinese government has been steadily promoting the unification of the bond market. In a document published in April, the government clarified that the country will steadily expand the size of the bond market, enrich its varieties and promote its interconnectivity.

The infrastructure interconnectivity at the bond market is conducive to facilitating cross-market bond issuance and trading, promoting the free flow of capital, so as to better support the real economy. It will also help unify and simplify trading, clearing and settlement procedures, boosting the attractiveness of China's bond market to foreign investors.