In spite of the exponential growth of Government bond issues in recent years, China's debt markets remain relatively narrow, illiquid and segmented, while the aggregate supply of tradable bonds appears low relative to market demand. Domestic demand for bonds has soared in recent years, partly as result of a sharp decline in equity prices. The range of bond instruments in terms of issuers, maturities and yields needs to be broadened, while new financial instruments, such as asset-backed securities need to be developed. The Government should discontinue using the domestic bond market exclusively or primarily for fiscal purposes. Domestic debt markets have to play a larger role in corporate finance, in meeting the requirements of institutional investors and in facilitating a market-based process of non-performing loan clean up, which remains a huge challenge. To accelerate development of more diversified domestic bond markets, the Government should permit high-quality domestic and foreign firms as well as multilateral development banks to enter the primary market as issuers, both in local currency and in foreign exchange (forex). In due course, issuing rights should be extended also to selected provinces and municipalities. Permitting the simultaneous issue and trading of bonds in multiple markets with full arbitrage between them would reduce market segmentation. Government should develop and perfect as rapidly as possible the legal and institutional framework for domestic debt markets, including bankruptcy and foreclosure laws and procedures, reliability and efficiency of courts, independent rating agencies and enforceability of court decisions. To avoid market disruption and unhealthy competition, domestic interest rates, still largely Government-controlled, should only be liberalized gradually. As financial sector reforms, including state bank recapitalization and listing, progress, controls on interest rates and on capital account transactions can be relaxed.