Should Chinese Citizens Be Allowed to Invest in China's Corporate Bond Market?
Currently, there is almost no participation from private individuals in China’s corporate bond market and corporate bonds are primarily held by China’s large commercial banks. This paper presents a theoretical proof that such an arrangement is suboptimal from the individual’s perspective. To improve investor welfare, authorities should implement policies to facilitate individual investment in corporate bond. Policy objectives should include (but are not limited to) lowering entry barriers to the bond market faced by potential issuers, establishing proper information/risk disclosure requirements, increasing secondary market liquidity, and increasing the enforceability of bankruptcy laws. Such policies would also mitigate problems associated with China’s “shadow banking system” and are also consistent with China’s long term policy goal of internationalizing the RMB.