The People’s Bank of China (PBoC) has now made it significantly easier for global investors to access China’s interbank bond market where over 90 per cent of bonds are issued and traded.
Measures introduced in July 2015 and further rules released in February 2016 allow preferential bond market access to a very broad range of global investors.
Under the regulations, sovereign wealth funds, central banks, commercial banks, insurance companies, asset managers, pension funds and securities companies can now invest without a quota or onerous approval process.
These measures have the added policy benefit of providing capital inflows into China which may help stabilise the currency amid a period of increasing capital outflows and a weaker RMB.
It is looking increasingly likely Chinese bonds will begin to find their way into global benchmark indices, for example the JP Morgan Government Bond Index – Emerging Markets (JBI-EM) and the Citibank World Government Bond Index. Inclusion in indices would certainly see flows into Chinese bonds.
Issuance by foreign corporates and financial institutions in China will grow as the so-called ‘Panda bond’ market re-establishes itself and China develops a more attractive issuance framework for offshore borrowers.
A diverse issuer base, as well as a diverse investor base, are key features of a well-developed bond market and will aid liquidity as well as market capitalisation.
Even Chinese government bond issuance could grow to satisfy future demand. According to consultants McKinsey & Co, Chinese government debt was approximately 55 per cent of GDP in 2014, compared with 89 per cent in the US, so there certainly appears scope for growth.
It won’t all be smooth sailing.
Concern about the potential for further RMB currency weakness against the USD has the potential to make Chinese bonds a less attractive investment.
In addition, even if China receives the maximum weight in the JBI-EM of 10 per cent, investors may run an underweight position given China’s lower relative yield compared to other emerging markets as well as the uncertain outlook for the RMB.