On May 11th, the People's Bank of China released its "China Monetary Policy Implementation Report for the First Quarter of 2026" (hereinafter referred to as the "Report"). A dedicated column titled "The Central Bank and the Bond Market" provided a first systematic explanation of the bond market's core position in money creation, interest rate pricing, and monetary policy transmission, explicitly highlighting the crucial role of banks in the bond market's operation. This statement has garnered significant market attention.
"Currently, China's financial system exhibits a distinct 'bank-led' characteristic. Against this backdrop, the bond market presents a unique structure of 'commercial bank-dominated bond holdings,' which is fundamentally different from the financial landscape in Europe and the U.S., characterized by 'dispersed institutions and non-bank-dominated bond holdings,'" an industry insider explained to the Financial Times.
Supporting data is compelling: In 2025, commercial banks underwrote bonds totaling 7.61 trillion yuan, accounting for approximately 34% of the market. This included 5.95 trillion yuan in local government bonds and 1.26 trillion yuan in financial bonds, representing underwriting shares of 58% and 33%, respectively. In both primary and secondary markets, commercial banks provide financing for enterprises and governments by underwriting and purchasing bonds. From the perspective of bond holdings, as of March 2026, commercial banks held about 64% of all bonds in custody. Specifically, their custody share was approximately 66% for national bonds, 69% for local government bonds, and 16% for corporate bonds.
"This demonstrates that commercial banks are the primary force in bond underwriting," said Lu Zhengwei, Chief Economist at Industrial Bank, in an exclusive interview. He further elaborated that commercial banks are deeply embedded throughout the entire bond market chain, playing a fundamental and critical role in three key dimensions—credit creation, pricing dominance, and policy transmission—making them the core pillar of China's domestic bond market.
The Report notes that within China's bank-dominated financial system structure, bank bond investment, similar to credit extension, serves as a vital method for financing the real economy and a significant channel for money creation. How should this be understood?
Modern monetary and banking theory indicates that bank asset expansion (through lending or purchasing bonds) generates deposits on the liability side, achieving money creation. Historically, China's money creation primarily relied on credit extension. Today, bond investment has become a core channel for money creation alongside credit, forming a dual-engine credit expansion pattern of "credit + bonds." In recent years, the bond market's role in credit creation has gradually strengthened. Commercial banks are key players in this process within the bond market, facilitating direct financing for governments and enterprises through underwriting, investment, and market-making activities in primary and secondary markets.
Data shows a growing role for the bond market in credit creation. From the perspective of the structure of aggregate social financing, the proportion of loan financing has declined in recent years, while the shares of government bond and corporate bond financing have gradually increased. Since 2023, government bond financing has risen to over 20% of the total. Starting from the second half of 2025, corporate bond financing increased from below 5% to around 7%.
Banks play a crucial role in this process. Specifically, banks participate in bond credit creation primarily through primary and secondary markets: in the primary market, they act as intermediaries providing services like underwriting; in the secondary market, they are both significant investors and market-makers providing liquidity. In fact, over the decade from 2015 to 2025, banks' bond holdings grew from less than 50 trillion yuan to over 100 trillion yuan, with their share of total assets increasing from 18% to 25%.
When banks purchase national bonds, local government bonds, or financial bonds, funds flow to governments and financial institutions, ultimately converting into corporate or household deposits, directly contributing to M2 growth. Simultaneously, bonds, as high-quality liquid assets, can amplify credit through pledged repurchase agreements, further enhancing money creation capacity. For example, corporate bond financing offers transparency, timely information disclosure, flexible maturity options, and fair pricing, which helps improve monetary policy transmission efficiency and provides greater convenience for secondary market trading. In the first quarter of 2026, corporate bond financing surged by 99.3% year-on-year, while corporate RMB loans saw a slight decrease of 0.69% year-on-year during the same period.
As the Report states, banks' bond investment and financing activities have become an important channel influencing money supply and credit creation. This implies that for the central bank to regulate money supply, it must not only manage credit but also oversee banks' bond investment behavior.
Beyond scale, the Report also emphasizes banks' significant role in bond price discovery, formation, and market stability, acting as the first gateway for interest rate transmission. How do commercial banks influence bond market pricing?
During the deepening stage of interest rate marketization reform, the bond yield curve is the core of the market benchmark interest rate system, and commercial banks are the dominant players in bond price discovery and the shapers of the yield curve. Regarding spot bond liquidity supply and pricing, according to the list of spot bond market-makers in the interbank bond market published by the National Association of Financial Market Institutional Investors (as of November 7, 2025), bank-type institutions account for approximately 65%. Excluding policy banks and foreign banks, domestic commercial banks still account for over 50%. Furthermore, commercial banks hold over 60% of all bonds in custody, giving them a dominant influence on spot bond liquidity and pricing in the secondary market. Reflected in trading volume share, commercial banks' monthly trading share consistently exceeds half, reaching 56% in March 2026.
Leveraging their significant scale advantage, banks possess strong price discovery capabilities, contributing to bond market stability. From the perspective of commercial banks' asset side, they continuously provide incremental funds to the bond market, endowing them with the ability to steadily anchor bond market pricing. Looking at the structure of fund utilization, as of March 2026, bond investments constituted 22% of commercial banks' assets. This represents an increase of about 4 percentage points compared to 2023, indicating a sustained inflow of incremental funds from commercial banks into the bond market, enabling their stable participation in bond pricing. With their notable scale advantage and consistent capital deployment, banks have strong price discovery capabilities, aiding in the smooth operation of the bond market.
In recent years, as China's financial system structure continues to evolve, the monetary policy framework is transitioning towards a price-based regulation approach. How should the role of banks in monetary policy transmission be viewed?
China's current monetary policy framework is shifting from "quantity-based" to "price-based" regulation, with the bond market serving as the core hub for price-based regulation. The policy transmission chain is clear: banks are primary dealers in the open market operations. Liquidity adjustment tools covering short, medium, and long-term maturities—such as the 7-day reverse repo, outright reverse repo, and open market national bond transactions—are all transmitted to the market through these primary dealers. According to the "People's Bank of China Open Market Operations Announcement [2026] No. 1," among the 51 primary dealers for open market operations, 41 are Chinese-funded banking financial institutions, accounting for 80.4%.
In monetary policy transmission, national bonds, serving as benchmark interest rate instruments, have a custody share of about 66% held by commercial banks, playing a decisive role in the formation and transmission of national bond yields. In the stage where monetary policy is transmitted to the real economy, changes in commercial banks' loan and deposit interest rates are also critical links, directly affecting transmission efficiency and conveying policy intentions to the real economy. It can be said that commercial banks are the core hub of monetary policy transmission.
From the perspective of liquidity supply, banks are the central nexus for liquidity transmission. Currently, the primary path for monetary policy liquidity transmission in China is: The People's Bank of China provides and withdraws liquidity to/from commercial banks (mainly large commercial banks) through open market operations. These large commercial banks then lend funds to smaller banks and non-bank financial institutions in the interbank market. Data from the China Foreign Exchange Trade System (CFETS) on monthly average daily net lending shows that over the past year, large commercial banks have been net lenders, providing an average of about 3.9 trillion yuan daily, while small and medium-sized banks and non-bank institutions have been net borrowers on average. Looking at data from April 2026, in terms of monthly reverse repo balances, commercial banks (including both large and small/medium-sized banks) held reverse repo balances of 8.4 trillion yuan, accounting for approximately 71% of the total monthly reverse repo balances across all institutions.
Thus, commercial banks provide crucial liquidity support to non-bank institutions such as insurance companies, fund companies and their products, wealth management subsidiaries, securities firms, and money market funds, as well as to small and medium-sized banks. Non-bank institutions have long relied on the banking system for liquidity. Banks' fund lending behavior is directly related to the stable operation of the market and systemic financial stability.
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