Photographer: Qilai Shen/Bloomberg

China Moves to Make $9 Trillion Domestic Bond Market Global

  • Chinese bonds offer investment opportunity, yields: Fidelity
  • Foreign ownership of onshore debt fell for second year in 2016

The tide may slowly be turning for Chinese bonds.

Citigroup Inc. said Tuesday it will include onshore Chinese debt in some of its gauges, while the central bank pledged to create a “more convenient and friendly environment” for foreign investors. This follows a recent measure to allow currency hedging for bonds, a move seen as one of many efforts needed to lower barriers.

The world’s third-largest debt market needs the money, with investors still smarting from the biggest slump in six years in January. Foreign ownership of Chinese onshore bonds fell to 1.3 percent last year even as outstanding notes surged 32 percent to 64 trillion yuan ($9.3 trillion), according to a Deutsche Bank AG report last month. Inflows would help stabilize the yuan, and buttress the nation’s dwindling foreign-exchange reserves.

“Further developing hedging tools would help spur investor participation and push the market closer toward broad index inclusion,” said Bryan Collins, a fixed-income portfolio manager at Fidelity International in Hong Kong. “I see great investment opportunities as the Chinese bond market is rapidly growing and the yields are attractive.”

The move to allow overseas investors access to China’s foreign exchange derivatives market was bolder than expected and may result in strong capital inflows, according to Standard Chartered Plc. Still, policymakers need to take additional steps in areas such as market access, liquidity, and reporting rules to address concerns, Goldman Sachs Group Inc. analysts said in a research note last month.

At the moment, onshore foreign exchange hedging tools, including foreign-exchange and cross currency swaps for bonds with a tenor over one year, aren’t that liquid, resulting in large pricing differences, according to David Qu, markets economist at Australia & New Zealand Banking Group Ltd. in Shanghai.

Speaking at a briefing in Beijing on Friday, People’s Bank of China Deputy Governor Pan Gongsheng said that China will steadily encourage overseas institutions to issue onshore and to invest in the domestic market.

“The PBOC will definitely improve arrangements of related regulations, such as law, accounting, auditing, tax and credit rating, and create a more convenient and friendly environment for overseas investors," Pan said. “We’ll need to communicate more with overseas investors in this process. I don’t think this is urgent. We’ll do it step by step."

Deutsche Bank estimates China’s bond market will expand by 27 percent this year, making it as large as the nation’s gross domestic product. Bloomberg Barclays Indices, owned by Bloomberg, included Chinese domestic bonds in some indexes on March 1. The onshore yuan has gained about 0.5 percent against the dollar this year to Friday.

“There are a lot of developments in recent weeks for hedging,” said Chia-Liang Lian, head of emerging-market debt at Western Asset Management. “It makes it very constructive in terms of the outlook for onshore investments in China.”

— With assistance by Jing Zhao, and Lianting Tu

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