China opens US$9trn bond market to foreign investors

clock • 2 min read

The long-awaited scheme allowing foreign investment companies to buy and sell Chinese bonds, has been launched to coincide with the 20th anniversary of Hong Kong’s handover from the UK to Chinese rule.

Chinese bonds can now be bought by banks, insurers and fund managers via The Bond Connect scheme in Hong Kong, opening up the China’s US$9trn bond market to widespread foreign investment for the first time.

China’s bond market is the third-largest in the world, but only 2% of Chinese bonds are foreign-owned. No date has been set for reciprocal Chinese investment into foreign bonds.

Mo Ji‎, chief economist Asia ex Japan at fund giant Amundi, dubbed the landmark move as “another step in the normalisation of Chinese capital markets” and a trend that “no one should underestimate”.

“Chinese stock markets account for 10% of global market cap, and Chinese bond markets rank 3rd in the world,” said Mo. “We will see their integration into global markets go progressively deeper. Governance and transparency will continue to improve in the process.

‘Strategic development’

“Investors who ignore this strategic development will be at a significant disadvantage. We will increasingly see Central Banks buying Chinese government bonds.

“Likewise Amundi expects to fully participate in Bond Connect, especially in relation to government bonds, and in the recent inclusion of Chinese A-shares in MSCI indices in late June.”

Claudia Calich, Emerging Market Debt Manager at M&G Investments, said: “The China – Hong Kong bond connect is another gradual step that China is taking in opening up its domestic bond market for foreign investors.

“Bond connect will have some operational advantages versus investing directly onshore in the sense that it will not require the investor to have a local custodian or accounts and it will not require the investor to be subject to quotas or reveal how much it intends to invest beforehand.

Government bonds

“I would expect that foreign investors would initially venture into government bonds as opposed to state-owned companies (SOEs) or corporate bonds given valuations, liquidity and the fact that this is still an incipient market.

“As such, the ratings will not be as key a driver for investment, but rather one’s views on the Renminbi, capital flows into and out of China, monetary policy and potential for inclusion of Renminbi-denominated government bonds in major global bond indices,” added Calich.

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