Another chief concern faced by the Chinese bond market is rivalry with the banking sector and equity market. Conferring to the pecking order theory in corporate finance, debt financing should carry lesser costs of capital than equity financing. However, many government officials, corporation managers and even private industrialists in China still treat equity financing as the inexpensive channel for financing, since the public companies relish the right offering, face slight domination and rules, and frequently do not pay any dividends. Facing with such a challenging setting, officials need to not only make the bond market obtainable for issuers and stakeholders, but also instruct the market on the mechanism by which each market operates.The rules on interest rate and issuance take away the elasticity of the bond market and many mixed investors. Without an extensive variety of tradable securities and a vigorous secondary market, bond market cannot completely relish its role of price detection and risk administration, which put bond financing into direct rivalry on interest rate with bank loans, to which many of the high-quality companies already have easy access.
Given the much higher administration and transaction costs, bank loans are often times favoured by issuers with admittance to both markets. While the Chinese domestic bond market has gone through a seven-fold enlargement over the previous decade, most bond issuers are government-linked, obviously giving rise to moral hazard dangers. The treasuries distributed by the Ministry of Finance (MoF), PBOC bills, and government-supported bonds collected have accounted for more than 70 percent of entire bonds outstanding. Apart from this most of the residual sections such as corporate bonds and commercial bank bonds are SOE and LGFV issues. The Chinese domestic bond market only saw its first rare defaults of SOE issuers in 2015, suggesting still significant moral hazard risk. Lastly, such government-linked bonds are separated into various segments with different controllers and obligors, thus distributing liquidity and depressing market complexity. Presently, not any of them can become important global asset classes on their own. When a given liquidity pool is separated into two equal market sections, the liquidity of each can decay by 80 percent or more.