Although China has been gradually opening up its $9.4 trillion domestic bond market to external investors, the number of foreign participants diving in is still tiny, analysts say.
On 3 July, the Chinese authority launched the Bond Connect scheme, a new mutual market access programme that allows investors from mainland China and overseas to trade in each other’s respective bond markets. The Chinese authority has also since announced that it will allow foreign agencies to give ratings to its domestic bond issuers.
However, there has been no great rush to invest; foreign money in the market amounts to just $119 billion – less than 2% of the market’s value. ‘There are three major reasons preventing foreign investors from participating in the onshore bond market,’ Angus To, deputy head of research at ICBC International told Citywire Asia.
‘The first reason is that foreign investors are quite concerned about the domestic Chinese rating agencies,’ he said. To explained that more than 80% of the domestic bond issuers would be given an AA rating or above, meaning that ‘there is no clear division between the lower and higher quality bond issuer’. He added that ‘domestic Chinese rating agencies need to be more in line with the global standard, as the foreign investors are more used to global ratings agencies’ approach for rating bond issuers.’
According to To, the second reason is that the market still fears the potential for further depreciation in the yuan, even though the yuan has just reached a nine and a half month high against the dollar. Some portfolio managers, such as Johnny Chen at NN Investment Partners, believe that the yuan will have stabilised by the 19th Communist Party Congress in October.
Finally, To said that the default risk of Chinese domestic bonds is also taken into consideration. ‘One of the main concerns for foreign investors is that they don’t have the instruments, such as credit default swap, to help them hedge the default risk.’
Besides the Bond Connect programme, foreign investors can also participate in the onshore bond market through the China Interbank Bond Market, Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor schemes.