By the end of 2025, bank holdings of bonds exceeded 100 trillion yuan, accounting for 25% of their total assets, a 7 percentage point increase from 2015. The bond-to-loan ratio reached 35%, up 6 percentage points from 2015. Bank bond investment and financing activities have become a significant channel influencing money supply and credit creation, according to data disclosed in the People's Bank of China's "Monetary Policy Implementation Report for the First Quarter of 2026" (referred to as the "Report").
This indicates that, with changes in financing structure and the transformation of bank operations, commercial banks' bond investment and financing activities have become a crucial channel affecting money supply and credit creation, stated a relevant business head at Ping An Bank. The primary dealers and market makers selected by the central bank are playing three key roles: liquidity hubs, pricing anchors, and market stabilizers, experts noted. In simple terms, banks act both as "transmitters" for policy implementation and as "ballast stones" for market operations.
Simultaneously, the importance of managing the bond market effectively has become particularly prominent. The central bank pointed out in the "Report" that, as China's financial system structure continues to evolve and the monetary policy framework transitions toward price-based regulation, there remains room for improvement in the pricing efficiency of China's bond market, as well as in the bond investment, trading, and risk management capabilities of institutions. The fixed income research team at CICC highlighted in a research report, "The central bank may be shifting from a primary focus on managing credit to placing equal emphasis on managing bonds and liquidity. This aligns with the gradual diversification of the central bank's monetary policy toolkit and the increasing flexibility and precision of liquidity management."
Bearing Multiple Roles Why are banks, as primary dealers, so important?
In the bond market, primary dealers and market makers hold pivotal positions. Among the 51 primary dealers in the open market, 41 are Chinese-funded banking financial institutions, accounting for 80.4%. In monetary policy transmission, commercial banks hold approximately 66% of the custody volume of government bonds, which serve as benchmark interest rate instruments, playing a decisive role in the formation and transmission of government bond yields. This underscores the significant position of banks in this process.
"As primary dealers and market makers, we position banks as 'transmitters' of monetary policy, pricing anchors, and 'guardians' of financial stability," said the business head at Ping An Bank.
The head explained that, as primary dealers and market makers, banks undertake the central bank's open market operations, transmitting the liquidity released through tools such as reverse repos, MLFs, and government bond transactions to the entire market, thereby smoothing short-term fluctuations. "The central bank releases liquidity through tools like reverse repos, MLFs, and government bond transactions. These primary dealers are like the main channels connecting a reservoir to downstream rivers, quickly and evenly distributing funds across the entire market and smoothing intraday funding fluctuations," an expert analogized.
Furthermore, as the primary bond investors, traders, market makers, and open market primary dealers, banks play a crucial role in bond price discovery, formation, and market stability, serving as the first checkpoint in interest rate transmission. An industry expert explained, "The government bond yield curve is the 'mother of pricing benchmarks' in financial markets. Market makers fill trading gaps in key maturity government bonds through continuous, transparent two-way quotes."
The aforementioned Ping An Bank business head also remarked, "Small and medium-sized financial institutions and non-bank institutions often face challenges such as 'difficulty finding counterparties and pricing.' The continuous quotes from market makers act like a ruler, letting the market know 'what the current value should be.'" More importantly, the central bank's policy rate signals are transmitted through the quoting behavior of market makers, forming a smooth, continuous, and effective yield curve. This, in turn, guides adjustments in other market rates such as loan rates and credit bond rates, ultimately facilitating the smooth transmission of monetary policy from financial markets to the real economy.
"Commercial banks, as core participants in the bond market, embody multiple roles including bond issuers, investment traders, market makers, and open market primary dealers. They play a significant role in bond price discovery and formation, market stability, and interest rate transmission," said Feng Lin, Executive Director of the Research and Development Department at Oriental Jincheng. In fact, the "Report" states, "Regulating and guiding bank bond investment and trading behaviors through bond market rules and the management of market makers and open market primary dealers is an important foundation for the effective implementation of monetary policy regulation." This indicates that advancing bond market reform and better leveraging the bond market's interest rate formation and transmission functions will be key to improving the interest rate transmission mechanism and enhancing the effectiveness of monetary policy regulation. It also points to the focus areas for subsequent bond market reforms.
Insufficient Pricing Efficiency and Rising Leverage Risks Industry Experts Prescribe Solutions for Bond Market Management
Why does the central bank place such emphasis on bond market management? This stems from the fundamental characteristics of China's financial system.
An industry expert noted in an analysis column that China has a typical bank-dominated financial system. Against this backdrop, the bond market exhibits a unique structure characterized by "commercial banks holding the dominant share of bonds," which differs fundamentally from the financial landscape in Europe and the U.S., where "institutions are dispersed, and non-banks hold the majority of bonds." By the end of 2025, China's bond market outstanding had reached 196.17 trillion yuan, with banks holding over 50% of the bonds. "This structure determines that managing banks' bond investment behaviors is equivalent to managing the 'key link' of the bond market."
However, the "Report" also frankly acknowledges that there are still shortcomings in the development of China's bond market, pointing out that "the pricing efficiency of China's bond market, as well as the bond investment, trading, and risk management capabilities of institutions, still need improvement."
Addressing these shortcomings, Wen Bin, Chief Economist at China Minsheng Bank, stated that the next step for the central bank may involve further strengthening guidance on pricing behavior to enhance pricing efficiency. Wen Bin pointed out that currently, there are two "bottlenecks" in China's government bond market: first, the proportion of short-term government bonds is relatively low—"if short-term rates are inaccurate, long-term rates are prone to deviation"; second, commercial banks are the absolute main force and tend to prefer a "hold-to-maturity" strategy, leading to insufficient market activity. "Subsequently, the central bank may guide and encourage commercial banks to appropriately adjust their investment strategies. They cannot just 'hold without trading'; they must also participate in trading to discover prices," he anticipated.
Regarding non-bank institutions, the "Report" notes, "China's non-bank institutions have long obtained liquidity from the banking system. Their bond investment and trading behaviors, as well as liquidity risks, are highly correlated with bank assets and liabilities. Excessive leverage, maturity mismatches, and other behaviors by non-bank institutions are also important factors triggering risks. Continuously strengthening investor risk management, improving bond market construction, and macroprudential management are crucial for preventing systemic risks."
Wen Bin analyzed that although banks hold the highest proportion of bonds, the most active traders are actually some non-bank institutions. "Small and medium-sized financial institutions and non-legal-person products with lower holding proportions are significantly more active in trading, especially securities firms, which account for nearly 30% of trading settlement volume. Consequently, non-bank institutions with relatively weaker risk management capabilities and more aggressive investment styles may engage in irrational trading behaviors if they exhibit excessive leverage or maturity mismatches, thereby affecting overall market pricing. Additionally, during market fluctuations or reversals, events such as defaults or forced liquidations are more likely to occur, potentially triggering panic across the entire market," he commented.
In response, industry experts suggest that the next step for regulatory authorities will focus on standardizing maturity mismatch behaviors and improving risk monitoring and early warning mechanisms to "eliminate risks in their infancy." According to CICC research analysis, the central bank may pay more attention to guiding and managing the bond investment behaviors and risk management capabilities of both banks and non-bank institutions, promoting the stable operation of the bond market to improve the monetary policy framework, maintain the stable operation of financial markets, and promote balance of payments equilibrium and RMB internationalization.
In comparison, banks often also play the role of "stabilizers" in the bond market. A market expert mentioned that in recent years, global financial markets have experienced significant volatility. "If signs of panic selling appear in the bond market, market makers cannot retreat; instead, they must proactively step up to absorb sell orders, preventing a 'stampede' decline. In extreme situations, we can also trade directly with the central bank to quickly obtain liquidity support." He likened this to a goalkeeper in a football match: "Usually inconspicuous, but at critical moments, they must make crucial saves."
Based on this, industry insiders recommend continuously deepening the bank market maker system. On one hand, improve incentive mechanisms so that market makers are "willing to quote and dare to quote"; on the other hand, strengthen constraints—clarify requirements such as minimum quote volume, maximum spread limits, and continuous quoting time. "For institutions that provide perfunctory quotes or engage in irregular market making, they should be downgraded or exited as appropriate," the insider believes. This is akin to putting a "tightening spell" on market makers, ensuring they effectively fulfill their liquidity supply responsibilities.
"Some people are accustomed to using European and American standards to evaluate our bond market management," the aforementioned industry expert stated. This perspective overlooks a fundamental issue—China's financial system is bank-dominated, and the development stage of its bond market differs from that of Europe and the U.S. He summarized that China's bond market model, characterized by "commercial banks holding the dominant share of bonds," is a rational choice determined by national conditions. The next step for the central bank will be to continue building on this structural characteristic, promoting the transformation of the bond market from "large in scale" to "strong in function, accurate in pricing, and low in risk." "It can be expected that the future bond market will no longer be a simple financing venue but will become a solid support platform for monetary policy transmission, financial risk prevention, and RMB internationalization," the expert said.
Commercial banks have also expressed active commitment. "Ping An Bank will adhere to the original purpose of finance, striving to be a good 'transmitter' of monetary policy and a 'stabilizer' of financial stability. Our direction of effort is to make policy transmission smoother and market operations more stable," said the relevant business head at Ping An Bank. The bank will base its efforts on central bank policy requirements, leverage the dual advantages of being both a "primary dealer" and a "core market maker," actively participate in reverse repos, MLFs, and government bond transactions, expand the coverage of quotes for government bonds, policy financial bonds, technology bonds, and green bonds, and continuously provide two-way liquidity. Additionally, it will expand the coverage of quotes for technology bonds and green bonds, and explore the use of AI market-making robots to improve response speed.