Foreign holdings of onshore Chinese debt will double over the next few years, as the local bond market reaches ‘critical mass’, according to analysts at Fidelity International.
China’s onshore bond market has a market capitalisation of around $9 trillion, but overseas investors’ holdings only make up around 2% of the total. Since 2010, China has launched several programmes to increase foreign participation in the market, including the creation of various legal structures to allow international fund managers to set up local entities, and, this year, the opening of the ‘Bond Connect’ platform.
In early 2018, international investors will be able to use onshore derivatives to hedge their interest rate risk, which will be ‘the big leap forward… for really bringing about a step up in international participation,’ fixed income portfolio manager Bryan Collins told a press briefing in Singapore on Tuesday.
CGB futures are available to domestic investors, but not to international players. ‘As soon as we can start doing that, then international investors will be able to allocate more capital onshore,’ Collins said.
International investors are also concerned about the relative lack of information available on companies’ creditworthiness. Local rating agencies are not always considered reputable, and international agencies have a limited presence.
However, access to information is improving as the market opens up, Collins said. ‘When we start seeing this critical mass, and the infrastructure start developing. Progressively, we will see more and more investors coming to the market.’