Since China introduced credit risk mitigation warrants (CRMWs) in 2010, the CRMW market has undergone more than a decade of development.
From optimizing the creation mechanism, to adjusting creation thresholds, and then to stabilizing creation scenarios, the CRMW market has begun to take shape, with annual creation volumes exceeding 10 billion yuan since 2019, enhancing to a certain extent the precision and effectiveness of financial services for the real economy.
This article analyzes and proposes that the CRMW market still faces important challenges in stimulating participant motivation and expanding market scale, and that regulators and market participants still have considerable room for improvement in collaboratively refining regulatory mechanisms, optimizing business rules, innovating product design, and cultivating market internal drivers.
Keywords
Credit risk mitigation warrants, liquidity, private enterprises, technological innovation.
Credit derivative instruments are a collective term for various financial tools used to separate and transfer the credit risk of underlying assets. Among them, credit default swaps (CDS) are the most typical product in international markets. CDS allow trading of credit risk without holding the underlying asset, and while offering trading flexibility and functional diversity, they also bring risks such as moral hazard, excessive leverage, and "naked short" speculation. The 2008 subprime mortgage crisis erupted against this backdrop. Drawing on international experience and lessons, China launched credit risk mitigation warrants (CRMWs), known as "China's version of CDS," in 2010, beginning to explore a localized development path for credit derivative instruments.
The Development History and Trends of China's CRMW Market
In 2010, the National Association of Financial Market Institutional Investors (hereinafter referred to as "NAFMII") issued the "Pilot Business Guidelines for Credit Risk Mitigation Tools in the Interbank Market" (hereinafter referred to as the "Guidelines (2010)"), officially launching CRMWs to help low-credit-rated enterprises carry out bond financing (see Figure 1). A CRMW is like an "insurance" policy for the underlying bond, offering greater flexibility compared to traditional credit enhancement methods. To prevent systemic risks from credit risk derivative instruments, NAFMII set up three "guardrails" for CRMWs by simplifying the transaction structure, limiting leverage ratios, and controlling trading purposes, ensuring healthy market development.
(1) Slow Development in the Early Stage of CRMW Launch
China's CRMW market developed slowly in its early stages, with creation volumes of only 690 million yuan and 50 million yuan in 2010 and 2011, respectively. One reason was insufficient motivation for credit protection buyers to participate. Taking commercial banks as an example, the "Capital Management Measures for Commercial Banks (Trial)" implemented from 2013 did not explicitly recognize CRMWs as qualified credit risk mitigation tools, so banks could not reduce credit risk-weighted assets by purchasing CRMWs, suppressing their willingness to participate. In addition, limited underlying scope, a single participant structure, a weak credit risk pricing foundation, and a lack of liquidity in the secondary market were also important reasons. In 2014, the bond market broke the implicit guarantee, and new changes emerged in the market environment and regulatory policies. NAFMII revised the "Pilot Business Rules for Credit Risk Mitigation Tools in the Interbank Market" (hereinafter referred to as the "Rules") in 2016, lowering market entry thresholds and simplifying the creation process in an attempt to activate the CRMW market (see Table 1). However, the "Rules" still limited the debt types of reference entities and did not relax restrictions on the underlying scope, failing to fully stimulate the enthusiasm of creation institutions. In addition, at that time, there were very few substantive defaults in publicly offered bonds, which could not stimulate bond investors' investment demand, and the CRMW market remained cold.
(2) The "Second Arrow" Policy Promoted CRMW Market Development
The turning point came in 2018. Under strong financial regulation and tightening non-standard financing, private enterprises faced a comprehensive contraction in financing channels, and default risks erupted in a concentrated manner. To solve the financing difficulties of private enterprises, in October of the same year, the State Council Executive Meeting decided to "establish a bond financing support tool for private enterprises," starting from the three financing channels of credit, bonds, and equity, and adopting a "three arrows" policy combination to support private enterprises in broadening financing channels. Among them, the "second arrow" was funded by the People's Bank of China through relending, entrusting professional institutions to follow market-oriented and law-based principles, and through guarantee credit enhancement, CRMW creation, and direct bond purchases, to support private enterprise bond issuance and financing. The "second arrow" activated the market from the outside. The policy explicitly designated CRMWs as the core means to support private enterprise financing, promoting the integration of CRMWs into the real economy financing process and giving them a stable creation scenario. This was a bold innovation and practice at the policy level to alleviate the financing difficulties of private enterprises. Before October 2018, the total creation scale of CRMWs was less than 2 billion yuan. Driven by the "second arrow," the combined creation scale in November and December 2018 exceeded 5 billion yuan, and in 2019 the annual CRMW creation scale rose to the level of tens of billions of yuan (see Figure 2).
(3) Continuous Optimization of Business Rules Promoted Deeper Market Development
Since 2020, national regulatory institutions and self-regulatory organizations have introduced a series of supportive policies and optimization measures to promote continuous market deepening and precisely serve the real economy. In 2021, business rules were revised to further simplify the market entry process. In 2024, relevant authorities optimized the tiered management mechanism for dealers. In May 2025, the People's Bank of China and the China Securities Regulatory Commission jointly issued the "Announcement on Matters Related to Supporting the Issuance of Science and Technology Innovation Bonds" (No. 8 of 2025), encouraging science and technology innovation bonds to "support the issuance and investment trading of science and technology innovation bonds through credit protection tools, credit risk mitigation warrants, credit default swap contracts, guarantees, and other businesses," clarifying new scenarios for CRMW creation. In the same month, the risk-sharing mechanism of the bond market's "technology board" was implemented, injecting vitality into the development of credit protection tools such as risk mitigation warrants. In June of the same year, NAFMII revised and issued the "Business Rules for Credit Risk Mitigation Tools in the Interbank Market," the "Business Guidelines for Credit Risk Mitigation Warrants," and supporting operational rules, building a more comprehensive and three-dimensional institutional framework and improving the self-regulatory management system of "self-regulatory rules—business guidelines—operational rules—standard texts," paving the way for CRMWs to support the development of science and technology innovation bonds. In January 2026, the People's Bank of China announced the merger and establishment of a risk-sharing tool for science and technology innovation and private enterprise bonds, providing a total relending quota of 200 billion yuan. After the merger, on the one hand, CRMWs can better and more accurately support entities that are "both private enterprises and science and technology innovators"; on the other hand, the unified and simplified management rules can improve the convenience for financial institutions to participate in the business, expand the scope of eligible enterprises, and enrich CRMW creation scenarios.
The Creation Performance of China's CRMW Market
In recent years, regulatory institutions and self-regulatory organizations have intensively introduced a series of supportive policies and optimization measures centered on "stimulating market vitality" and "serving the real economy," including the extension and expansion of the "second arrow" policy and revisions to CRMW-related business rules. Against this backdrop, the market has formed a main creation model of "bond issuance + CRMW," and its function of supporting bond financing in key areas such as private enterprises and technological innovation has initially emerged, enhancing to a certain extent the precision and effectiveness of financial services for the real economy, and presenting the following characteristics.
(1) Bond Yields Declined, Narrowing the Creation Space for CRMWs
Driven by factors such as continuously strengthened market self-regulation, gradually optimized operating mechanisms, and continuously improved market service efficiency and level, the total creation scale of CRMWs once showed a growth trend, reaching a peak of 36.336 billion yuan in 2023 since the launch of CRMWs. In 2024, under the influence of multiple factors including accommodative monetary policy, bond market yields declined and credit spreads narrowed, reducing the fee space for CRMW creation, and the creation scale continued to decline. By 2025, the creation scale had fallen to the level of 2020 (see Figure 3). From the perspective of creation structure, "bond issuance + CRMW" is the main creation model in the market, with CRMWs created under this model accounting for more than 90% of the total creation scale. The proportion of the "existing bonds + CRMW" creation model remained at a low level.
(2) The Development of Science and Technology Innovation Bonds Injected New Vitality into the CRMW Market
In 2025, although the number and scale of CRMW creation declined, CRMW business, while playing its risk-sharing function, became closely integrated with the "five major articles" of finance. Driven by development policies for science and technology innovation bonds, the structure of credit protection objects underwent a major shift, and CRMWs linked to science and technology innovation bonds injected new vitality into the market. In 2025, a cumulative 42 CRMWs linked to interbank market science and technology innovation bonds were created and registered, a significant increase of 26 from the previous year. Among them, 35 were created after the implementation of the bond market's "technology board," accounting for 83.33% of the total, cumulatively supporting the successful issuance of 33 science and technology innovation bonds with a total scale of 12.655 billion yuan (see Figure 4).
(3) CRMWs' Function of Supporting Private Enterprise Financing Gradually Strengthened
From the perspective of the enterprise nature of bond financing entities linked to CRMWs, the scale and proportion of private enterprise bond financing supported by CRMWs have shown a trend of expanding year by year since 2022, while the scale and proportion supporting state-owned enterprise bond financing have generally shrunk year by year (see Figure 5). This was mainly due to the extension and expansion of the "second arrow" in November 2022, which expanded the support scope to private enterprises including real estate companies and explicitly increased support for private enterprise bond financing in terms of funding scale. CRMWs are gradually strengthening their function of supporting private enterprise financing, demonstrating the significant driving role of the "second arrow."
(4) Linked Entities Mainly Have Medium to High Credit Ratings
From the perspective of the credit ratings of state-owned enterprises linked to CRMWs, before 2022, the credit ratings of linked state-owned enterprises were mainly AA and below; after 2022, the creation scale and proportion of CRMWs linked to AA-rated and below state-owned enterprises showed a declining trend year by year, falling from 88.97% in 2022 to 14.64% in 2025. Among the credit ratings of state-owned enterprises linked to CRMWs in 2025, AA+ had the highest proportion, with its creation scale accounting for 57.27% (see Figure 6). The credit ratings of CRMWs linked to private enterprises were mainly AAA and AA+. From 2021 to 2025, the combined scale of bond financing supporting AAA-rated and AA+-rated private enterprises accounted for about 90% of the total scale, significantly higher than the corresponding proportion for state-owned enterprises (see Figure 7). At the same time, market data showed that in 2025, for the first time, there were cases linked to private enterprises rated below AA, and the number of private enterprises without public ratings supported increased to 3. Although the absolute number is still small, this phenomenon indicates, on the one hand, that the market is gradually exploring the boundaries of CRMW creation, and on the other hand, that investor confidence in private enterprises, especially science and technology innovation private enterprises, has strengthened. From the perspective of the credit ratings of entities linked to science and technology innovation bonds, the overall rating was still mainly AA+. At the same time, in 2025, among entities linked to science and technology innovation bonds, the number and proportion of entities with credit ratings of AA and below and unrated entities both rose substantially, and the rating coverage range expanded significantly compared with the previous year, indicating that CRMW support for financing by lower-rated entities is gradually increasing (see Figure 8).
(5) CRMW Creation Terms Favor Medium to Short Maturities
From the perspective of CRMW creation terms, the overall trend is toward medium to short maturities. In recent years, the proportion of CRMWs with creation terms of within 1 year (including 1 year) has been around 50.00%; the proportion of those with 1–3 years (including 3 years) rose significantly to 45.36% in 2025; and the proportion of those with 3–5 years (including 5 years) fell sharply from 37.05% in 2021 to 4.12% in 2025 (see Figure 9). The decline in the number of long-term CRMW creations was partly affected by the shortening of the issuance terms of linked bonds, and partly reflected that the term preference of creation institutions is concentrated in medium to short maturities.
Suggestions for the Development of China's CRMW Market
Driven by national policies, through the "CRMW + bond" creation model, CRMWs have achieved results in supporting private enterprise bond financing, but their creation scale and the number of supported enterprises remain very limited, and they mainly involve high-credit-rated entities, with underlying bonds mostly being medium- to short-term varieties. NAFMII adheres to the principles of "simplicity and transparency, leverage control, and serving real needs," limiting the underlying scope of CRMWs, clarifying risk control indicators, and setting up a tiered management mechanism, effectively restraining their speculative attributes. However, these policies inevitably create a certain misalignment between the original design intent of CRMWs and the trading motivations of market participants, and the enthusiasm of market participants still needs to be further stimulated.
(1) Further Stimulate the Creation Motivation of Credit Protection Sellers
Although CRMWs have developed for more than 10 years, creation institutions are still mainly composed of a small number of commercial banks, securities companies, and credit enhancement institutions, and the market is still in the process of exploratory development. Problems such as imperfect pricing methods and unequal risk-return profiles have led to insufficient creation motivation among credit protection sellers. When selecting bond-issuing enterprises, creation institutions mostly choose enterprises with higher credit qualifications, reference entities are still mostly high-credit-rated entities, and underlying bonds are mostly medium- to short-term varieties. At the same time, credit risk pricing methods are still imperfect, and in actual business, CRMW creation institutions often announce a relatively wide protection fee range and leave the final pricing power to the market through book building. Such a pricing model reduces the premiums collected by creation institutions, thereby lowering the financing costs of issuers and enhancing the attractiveness of CRMWs to high-risk bond issuers. However, the scale of CRMWs held by creation institutions is relatively small, and the premiums they collect are not yet sufficient to cover risks, resulting in insufficient creation motivation. Therefore, China's credit derivative pricing level should be improved. Based on the design characteristics of CRMW products and comprehensively considering market prices and credit risk hedging principles, it is suggested that pricing in the primary market reference the differences in credit risk levels between creation institutions and underlying bonds. Creation institutions can then charge more reasonable premiums, precisely matching risk and return, and stimulating their own creation motivation.
(2) Further Mobilize the Purchase Enthusiasm of Credit Protection Buyers
The capital relief effect is difficult to realize, and there is a misalignment between products and actual risk management needs, resulting in weak purchase willingness among credit protection buyers. First, because the capital relief effect of CRMWs is difficult to realize, commercial banks rarely purchase CRMWs as credit protection buyers. Although the "Capital Management Measures for Commercial Banks" implemented from January 1, 2024 revised and improved the relevant provisions on their capital relief effect, due to the high threshold for applying hedge accounting, CRMWs purchased by commercial banks are often classified as "trading financial assets" in trading accounts and cannot relieve credit risk capital in their banking accounts. Second, for bond investors, purchasing CRMWs in addition to bonds dilutes investment returns, and the underlying bonds currently selected by creation institutions already have relatively good credit quality, so the attractiveness of additionally purchasing credit protection is not great. Therefore, all market parties should work together to solve the capital relief problem of credit derivatives and stimulate the participation motivation of commercial banks as credit protection buyers. At the same time, creation institutions should be encouraged to expand the coverage of credit derivatives, appropriately lower credit qualification requirements, select longer-term underlying bonds, and gradually achieve support for financing by low-credit-rated enterprises.
(3) Activate the Circulation Attributes of Warrant-Type Products in the Secondary Market
After creation, CRMWs are mostly held to maturity, and the secondary market lacks liquidity, suppressing the willingness of both trading parties to participate. For CRMWs, only by circulating in the secondary market to investors with different risk preferences can credit risk be reallocated, thereby fully giving play to their risk-sharing function. Although the business rules revised and issued in 2025 removed restrictions on transfers of warrant-type products between general dealers, market participant types are concentrated and risk preferences are similar, making it still difficult to find counterparties in the secondary market with complementary risk preferences and trading willingness. Therefore, the number of core dealers should be appropriately increased, and the scope of market participants should be expanded in a timely manner, so as to achieve the goals of increasing the number of market participants and diversifying risk preferences, and enhance secondary market trading activity.
(4) Increase the Coverage Ratio of Actual Creation Scale to Underlying Bonds
Under the linked model of "bond issuance + CRMW," CRMWs are created in sync with the underlying bonds, and investors independently choose whether to purchase them. The actual creation scale is subject to the actual sales situation of CRMWs, and there is a risk that full creation may not be achieved or that creation may even fail. From 2021 to 2025, the coverage ratio of actual CRMW creation scale to underlying bond scale was around 30%, and the overall coverage ratio was relatively low. It is suggested that regulatory institutions and management organizations adjust the functional positioning of CRMWs in the bond issuance process through institutional design, improve the certainty of their creation, and strengthen their credit enhancement and risk-sharing functions. At the same time, all market participants should collaboratively innovate product structure design, enrich the product system hierarchy, and strengthen the credit risk mitigation effect through a multi-tier risk-sharing mechanism.
Notes:
1. Moral hazard refers to lending institutions transferring loan credit risk off their books by purchasing CDS, thereby relaxing the enforcement of due diligence and prudent lending. Excessive leverage refers to credit protection sellers being able to sell credit risk scales far exceeding their own capital coverage capacity; synthetic collateralized debt obligations (CDOs) allow buyers to place repeated bets on the same batch of CDS, causing the credit risk scale to detach from the actual value of the underlying assets; "naked short" refers to credit protection buyers being able to buy large amounts of credit protection against a reference entity without holding the underlying bond, forming a pure credit short position.
2. There are cases where multiple CRMWs support the issuance of the same bond.
References
[1] Meng Dezhou. Development of International Credit Derivative Instruments in the Post-Crisis Era and Their Impact on China [J]. Economic Research Guide, 2024(11).
[2] Nie Cong. Viewing the Real Risks of Credit Derivative Instruments from the U.S. Financial Crisis [J]. Economic Vision, 2010(2).
[3] Wang Huanzhou, Huang Shuai, Yan Huan. Credit Risk Management: Interpreting CDS Contracts and Exploring China's Path [J]. Financial Market Research, 2016(8).
[4] Wang Huanzhou, Dong Youying, Yan Huan. Development Status and Policy Suggestions for China's Credit Derivative Instruments [J]. Bond, 2020(12). DOI: 10.3969/j.issn.2095-3585.2020.12.019.
[5] Wang Keli. Promoting the Development of the Credit Derivatives Market Based on Insurance Thinking [J]. Bond, 2024(10). DOI: 10.3969/j.issn.2095-3585.2024.10.017.
[6] Wang Lingxi, Hu Feibo. A Preliminary Exploration of the Development of China's Credit Risk Mitigation Tools [J]. Bond, 2019(11). DOI: 10.3969/j.issn.1674-747X.2013.10.008.
Comments