China opens up domestic bond market to foreign investors

China is taking steps to make its domestic bond market – worth an estimated US$9 trillion – more global and welcoming for overseas investors.

Speaking at a briefing in Beijing, Pan Gongsheng, a deputy governor of the People’s Bank of China (PBOC) said that China will steadily encourage overseas institutions to issue onshore and to invest in the rapidly-growing domestic bond 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.”

China’s domestic bond market is estimated to be worth 637 trillion renminbi (RMB), or around US$92 trillion, making it the world’s third-largest and well positioned to overtake Japan in the near future and take second place.

The China Interbank Bond Market (CIBM), which accounts for nearly 90% of the domestic bond market, is overseen by the PBOC but data shows that at the end of 2016, there were no more than 430 foreign investors holding around RMB 870bn or 1.37% of all Chinese bonds.

In recent years, the Chinese government has been steadily opening up the domestic bond market to foreign investors and issuers. These efforts help achieve several policy objectives, including establishing China as a leading financial centre, modernising China’s financial system, promoting RMB internationalisation and boosting capital inflows to counteract outflow pressures.

Most recently the government agreed to allow currency hedging for bonds, a move regarded as important towards lowering barriers. However, in a recent Goldman Sachs research note, its analysts suggested that policymakers need to take further measures in areas such as market access, liquidity, and reporting rules to address concerns.

Deutsche Bank expects China’s bond market to grow by 27% this year, making it as large as the nation’s gross domestic product (GDP). Bloomberg Barclays Indices, owned by Bloomberg, added Chinese domestic bonds to some indexes at the start of this month and Citigroup said last week that it will include onshore Chinese debt in some of its gauges.

The ability to hedge foreign exchange (FX) exposure onshore alleviates concerns about investing in China’s domestic bond market. The steady liberalisation should make China’s bond markets even more attractive for international investors and issuers, and pave the way for the inclusion of Chinese bonds in major global bond indices.

 

 

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