China’s bond market to appeal to foreign investors

The addition of China’s US$12 trillion bond market to the Bloomberg Global Aggregate Index from 2019 is expected to drive high demand from foreign investors, with other world indices expected to follow suit, according to Australian investment manager QIC.

The firm’s recent investment insight “An illusion-free take on China’s bond market” found this change would not only represent some new opportunities for foreign investors but it would also significantly change the way of “accessing the China story” by offering investors benefits such as greater yield and diversification.

Additionally, other benefits coming from foreign investment for China, except from attracting portfolio flow, would include a reduction in systemic risk in the Chinese banking sectors as the companies obtain financing in local corporate bond markets under greater scrutiny and market discipline than they had previously had from domestic investors, according to the study.

So, what does it mean for foreign investors?

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QIC’s managing director, global liquid strategies, Susan Buckley said reasons investors should invest in China’s bond market should not be limited to the market’s enormous size but also its ability to invest and transact more freely, as well as repatriate capital unimpeded.

According to QIC, China’s onshore bond market was previously difficult to access for foreign investors who owned less than three per cent of it versus 43 per cent foreign ownership across developed countries such as Germany, the UK, Australia and France.

The change, however, would open this market for foreign investors who would be able to buy Chinese debt without going through a complicated process, which required opening an account in China as well as finding a local clearing agent.

“We believe this diversification is the greatest benefit Chinese bonds can bring to fixed-income portfolios, including the reduction in return volatility due to the lower correlation of CNY bond yields to movements in global interest rates,” Buckley noted.

“China is the world’s second largest debt market behind the US and we see excellent prospects for growth, encouraged by the willingness of the national government to increase fiscal spending to offset any slowdown in private and local government investment, as well as the efforts of local governments towards bond financing to raise money.”

From April 2019, the Bloomberg Barclays Global Aggregate Index is planning to include Chinese yuan-denominated government and policy bank securities, which would translate into roughly 400 Chinese securities, representing around 5.5 per cent of the US$52.9 trillion index.