Market Views: Fixed Income
Schroders Quickview: Why the opening up of China's bond market is welcome
The People’s Bank of China has announced on Wednesday that it will be removing quotas on its bond market. The opening of the bond market to long-term investors is a significant step in the further integration of the Chinese capital markets into global markets.
More recently, the focus has been on measures to limit outflows but this step represents a continuation of the medium term opening policies.
So far, we have seen an increase in quotas for private investors, the removal of quotas for foreign central banks and the inclusion of the RMB into the SDR basket (an international reserve asset, created by the International Monetary Fund, which member countries can use to supplement their official reserves).
We believe that many global institutional investors will welcome this news as:
- It gives them the opportunity to increase their holdings in Asia in a large liquid market in addition to Japan;
- In a world where a very large proportion of liquid bond markets outside the US have negative yields, Chinese overnment bonds will provide positive yield;
- Despite the recent concerns about the Chinese currency’s performance against the US dollar, the RMB is moving towards floating more freely; and
- China’s external position has a positive and increasing trade surplus.
We believe that as operation details are spelled out, bond index providers could start including Chinese onshore bonds in global indices. This would also attract global investor interest.
Nevertheless, uncertainty around the currency policy remains one of the larger hurdles for foreign investors. However, this should be resolved as the year progresses and would then be a signal to increase investments in Chinese government bonds.
Opening up the bond market
The Chinese offshore ("dim sum") bond market is suffering from the high implied yields due to expectations of sharper currency depreciation. Issuers do not want to pay high yields and buyers are worried about the volatility.
The opening up of the onshore market will further encourage international investors to migrate towards the more liquid domestic market. The higher offshore yields and international legal framework will maintain a certain attraction for the dim sum bond market.
Meanwhile, short-term pressures on the currency are still strong and we expect the currency to remain a source of concern until the currency policy becomes clearer to market participants.
This may require more time as the changes have been recent. It was only in August that the RMB moved away from the US dollar and in December that the trade-weighted basket was made more explicit.