Market Hails Opening of Chinese Onshore Bond Market

Shanny Basar

Overseas investors have already filed to gain access to the Chinese onshore bond market, the third largest in the world, which market participants have hailed as an important breakthrough in liberalisation of the country’s capital markets.

In February this year Chinese regulators announced they would make it easier for overseas investors to access the China interbank bond market (CIBM) as a further step in the internationalization of the renminbi. In addition to the existing quotas, international investors can now trade onshore bonds directly through banks with a Type A licence, held by 13 Chinese banks and four foreign banks – BNP Paribas, Deutsche Bank, HSBC, Standard Chartered.

Mark Austen, chief executive of the Asia Securities Industry and Financial Markets Association (ASIFMA) said at the 2nd China Capital Markets European Conference in London today that the CIBM reforms will allow overseas investment in the $7.4 trillion market, the third largest in the world after the US and Japan. “There is only 2% overseas ownership so the capacity for foreigners to invest is huge,” he added.

The implementing rules to access the CIBM market were issued by  the People’s Bank of China, the central bank, on 27 May.

Yin Ge, Counsel Shanghai at law firm Clifford Chance, said at the conference: “There has been a lot of interest from overseas investors and take-up has been encouraging. The PBOC has said six funds have successfully filed.” She added many international asset managers and pension funds are waiting to file with the PBOC as the implementing rules have only just been released.

Liang Si, head of bond syndicate Asia at BNP Paribas, said at the conference that the liberalization of the onshore bond market was a milestone. She added: “There is no reason for a global investor not to look at China.”

Si said obstacles for foreign investors were concerns over the ability to repatriate funds due to China’s capital controls and foreign exchange risk. There were 128 authorised overseas investors in China in 2014 according to Si and 303 last year. “We expect more by the end of this year,” she said.

JPMorgan Chase placed the CIBM market on review to be included in its emerging market bond indexes following the announcement by the PBOC in March. Si continued that bond index inclusion is on BNP Paribas’ watchlist but index providers were likely to want to see more transaction volumes.

“Index inclusion could lead to $155bn of inflows and is realistic in the next few years,” Si added.”Bringing a benchmark to the market is very important but there is a hurdle in the lack of available onshore hedging through the repo market.”

Michael Chow, head of international business, Fullgoal Asset Management (HK) Limited, said at the conference that the opening of the CIBM market was a breakthrough. He added: “For investors the yield pick-up is very attractive as a 10-year onshore bond is just above 3% compared to negative yields on many European government bonds and the CIBM has low correlation.”

He continued that challenges for investors include the requirement for local credit ratings, which are very different from international ratings, and the likelihood of increasing defaults.

Chow said: “As a result, yesterday we listed an exchange-traded fund on the London Stock Exchange so investors can access the onshore bond market.”

The Fullgoal FTSE China Onshore Sovereign and Policy Bank Bond 1-10 Year Index ETF, is the first ETF by an independent Chinese issuer in Europe according to the LSE. The ETF will track the FTSE China Onshore Sovereign and Policy Bank Bond Index, which is designed to reflect the performance of renminbi bonds issued by the Chinese government, China Development Bank, Agricultural Development Bank of China, The Export-Import Bank of China which are circulated in mainland China. The RMB-denominated ETF can be traded in euros and US dollars and will also be listed in Italy this week.

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