China is making progress in liberalising its financial inflows. The domestic bond market is significant enough to entice investors, while ongoing reforms are making the debt market more attractive.
The globalisation of China’s capital markets is now gathering momentum. Even though it’s had a short history in terms of development, the bond market is now the world’s third-largest, trailing the US and Japan. It is currently valued at around USD9.5 trillion.1
“You don’t get that many opportunities where you see a gigantic market opening up further,” explains Timothy Yip, Head of Cross-Border Renminbi, Debt Capital Markets for Asia-Pacific at HSBC.
“For the last 20 years, the Chinese bond market has been closed and isolated. Now what we are seeing is that for the very first time, they are willing to open it up step by step. The bond market in China has also been growing exponentially,” he explains.2
The number of foreign institutional investors registered in China’s bond market was only around 50 in 2011. By the end of 2016, it had increased to more than 411.3
China has now introduced a bond trading link between Hong Kong and the mainland called Bond Connect. Foreign investors, including central banks, sovereign wealth funds and international financial organisations, will be able to trade sovereign and local government bonds, policy bank bonds, as well as corporate debt via Hong Kong.4
This brings one of the world’s largest debt markets closer to the portfolios of international investors. Recently, HSBC was one of the first banks to take advantage of this Bond Connect scheme.5
“Chinese bank bonds are yielding somewhere in the region of high three to mid-four per cent. Compare this to the yield on US or eurozone government bonds, which sometimes can be negative, this is a massive difference,” stated Mr Yip at the recent HSBC Financial Institutions Conference in Shanghai.
“The size of the bond market in China is growing exponentially every year. As of last year, its market capitalisation has exceeded over USD9 trillion,” states Patrick Wong, Head of China Sales and Business Development at HSBC Securities Services. China is now the third-largest fixed income market in the world after the US and Japan.
Despite being one of the largest bond markets in the world, foreign investors still only own less than two per cent.1 There are historical reasons for this. It was only in February 2016 that China’s interbank bond market became officially open to a wide array of foreign institutional investors.
Today, when compared to the size of China’s economy, investment in the debt market from overseas is paltry. The fixed income market in China is significant, so this is a very good opportunity for foreign investors to consider this market. Global institutions purchased over RMB175 billion (USD25.54 billion) in China’s debt last year.6 Now Chinese bonds are also included in a number of global indexes.7, 8
Despite progress in opening up the bond market, there have been some reticence among overseas investors to get involved, partially due to the lack of a universal and globally recognised ratings system in the country.
“China’s markets are actually difficult for a foreign investor to navigate. That’s why fund houses in the onshore and offshore market can provide local insights and knowledge as well as advise them,” says Louis Lu, Portfolio Manager, Head of US at CSOP Asset Management.
Recently, the country has opened up the market for local bond ratings to global agencies, with the People's Bank of China allowing foreign ratings companies, such as Standard & Poor’s, Fitch and Moody’s, to now assess the risks of China’s bonds. This could lead to more precise pricing and a greater gauge of the real risks.9
“We get asked a lot about whether China should be adhering themselves to international standards,” declares Mr Yip. “I think everybody agrees to some extent that to bring international standards and practices into China might not work because China has its own ways of doing things just like in the US domestic market or the European capital markets.”
Yet the invitation to allow US credit-rating agencies to enter China’s domestic market is a sign that the authorities are keen to attract further foreign investment into China’s onshore bonds. The quality of domestic ratings could be challenged in the process.10
“It’s about taking the best practices that work for China and then harmonising those with what is going on in China and bringing the standards up to a level which is advantageous and beneficial for both investors, issuers, the regulators and all the relevant stakeholders,” details Mr Yip.
- Hong Kong Bond Connect gets green light, China Daily
- China bond party attracts few takers, Financial Times
- Tapping into China’s Domestic Bond Market, Hong Kong Stock Exchange
- China broadens investor access with bond connect, Financial Times
- Brisk trade marks start of China, Hong Kong Bond Connect scheme, Reuters
- Foreigners Cut Chinese Bond Holdings First Time Since 2015, Bloomberg
- Citi first to fully include onshore Chinese debt in bond benchmarks, Financial Times
- Surge of foreign buying builds case for China bond index inclusion, Financial Times
- China opens local bond ratings to global agencies, Reuters
- Foreign investors welcome US credit agencies to China bond market, Financial Times