In the world of fixed income, China is quickly drawing international interest and investment. Its bond market has been steadily opening up, which has led to the inclusion of China “rates” bonds – a category consisting of government bonds (CGBs) and policy bank bonds – in a number of major international bond indices.

As a result, many investors are rapidly building their China exposure, albeit from a low base. Foreign ownership in China’s “onshore” bond market – bonds denominated in renminbi (RMB) – has doubled in less than three years, according to Yin Liu, who spoke at the Allianz Global Investors 2021 Asia Conference in June. Mr Liu is a senior director of international cooperation at China’s National Association of Financial Market Institutional Investors (NAFMII)¹. At the end of 2020, according to Mr Liu, foreigners owned RMB 3.25 trillion of the bonds traded on the China Interbank Bond Market (CIBM). That is equivalent to 3.23%,²  up from the June 2018 figure of 1.5%.

What is attracting so much international investment? Some of the top factors are the attractive yield pick-up of Chinese bonds versus other markets, alongside ample monetary policy flexibility from China’s central bank. But the international investors recently drawn to Chinese bonds would not even be considering this asset classes without the steady stream of reforms that recently opened up the market.

“This influx of foreign flows has been happening for two or three years,” explained Mr Liu. “It’s very profitable to invest in China. Further, the economy is stable, monetary policy is normal and we have ample tools to take care of any market turmoil. That’s the main backdrop for the foreign inflow of money. But we do a lot of work to support the foreign investors coming into the market.”.

Opening up of the onshore bond market

The work to make China’s onshore markets more accessible started over a decade ago (see accompanying timeline).

• Since 2011, a series of reforms allowed foreign investors increasing access to a wider range of fixed-income instruments in China’s onshore bond market.
• A milestone event was the introduction of China Interbank Bond Market (CIBM)³ Direct in 2016, which allowed foreign investors quota-free access to CIBM. All that was required was registration with the People’s Bank of China (PBoC) and the appointment of an onshore custodian bank.
• Separately, in 2017, the introduction of the Bond Connect programme enabled trades to be settled via custodian banks in Hong Kong, further liberalising foreign investors’ market access to the mainland bond market through Hong Kong.

As the market opened up, major global bond indices began to include CGBs and policy bank bonds, which further encouraged international investors. Most recently, FTSE Russell completed the inclusion of CGBs in its flagship FTSE World Government Bond Index (WGBI). The initial inclusion came in March 2021, at a 5.25% weighting.

Market access regulations have relaxed in recent years

Source: IPECapital, Data as of 30 September 2019. The above is for illustrative purposes only and is not a recommendation or advice to buy or sell any security. Past performance, or any prediction, projection or forecast, is not indicative of future performance.

Looking forward

Even as foreign investment has ramped up, some foreign investors have become worried about rising credit defaults and poor liquidity in corporate credit bonds in particular. On both topics, Mr Liu stressed that the regulators are alert and taking action. In the case of credit ratings, he cited the enforcement actions taken against local rating agencies, as well as the issuance of licences to international agencies S&P Global and Fitch Ratings. He also said that NAFMII was examining ways to improve liquidity in areas such as government bonds and repurchase agreements (repos).

What Mr Liu made clear was that the regulators, led by the PBoC, were committed to continuing improving the market, listening to investors as they go.

Giving an international investor’s view, David Tan, CIO Fixed Income Asia Pacific at Allianz Global Investors, said: “Recently, we've seen Asia grow tremendously and become a big part of most global equity portfolios. As a bond market investor myself, I see this trend also happening for the RMB bond market. I think it's just the beginning.”

¹ NAFMII was founded under the approval of the State Council of China to aid the development of China’s over-the-counter (OTC) financial markets. These OTC markets include China’s inter-bank bond market and foreign exchange market, among others.
² Sources: China Central Depositary & Clearing Co. Ltd.; Shanghai Clearing House.
³ CIBM is the main trading venue for Treasury, policy bank and commercial bank bonds accounting, accounting for 85% of the entire onshore bond market. Originally, foreign investors were allowed to invest in the CIBM under the QFII/RQFII market access schemes, following certain quotas.

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