Going from this quote by Bryan Collins of Fidelity on China's economy:

One of the nice things we see from the development of a domestic bond market is that it starts the process of pricing capital better. And when you price capital better, you get a much better chance of that capital being allocated more efficiently.

I can certainly follow Collins' logic, but I don't understand the economic theory that underpins this logic.


Why is it exactly that a developed bond market leads to more efficient allocation of capital?


1 Answer 1


This is no different from any other markets... just for money.

On the demand side of the goods, those who want money (those who sell bonds) say how much they're willing to pay in terms of bond yields. The supplier of the goods (bond buyers) come to the bond market and choose the product.

Under a developed bond market, it's guaranteed that those who get the goods (money) are the bond sellers who could pay the highest [risk-adjusted] price, which would infer that they could use that goods most productively. It's also guaranteed that those who sell the goods (bond buyers) are the ones who require the lowest price, i.e. opportunity cost is the lowest.


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