China's bonds appeal to foreign investors as reforms clear way

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04:00

Global investors are keen to capture the opportunities from the world's third largest bond market, as US treasury yields fall while Chinese regulators clear bottlenecks that have kept international investors on the sidelines.

The China Foreign Exchange Trade System (CFETS) and Bloomberg announced more channels to trade Chinese debt at the China Bond Market International Forum held Thursday in Beijing.

The move will make Bloomberg the first global trading platform that connects CFETS directly and offers access to both CIBM Direct and Bond Connect, the two most popular channels used by offshore China investors.

"This is a very important step for us, it provides an additional channel to access the Chinese market, and we are very encouraged for all the dialogues that we were having with Chinese regulators," said Bing Li, head of Bloomberg Greater China.

"The regulators are very aware of what's needed and the interest from international market, so the direction for reform is clear. And also, the willingness for reform is very strong."

About 1,200 overseas institutional investors have bought Chinese onshore bonds with a total outlay of 1.73 trillion yuan (250 billion U.S. dollars), among which 505 investors entered the market through Bond Connect, according to Pan Gongsheng, head of the country's foreign-exchange regulator.

For efficiency to catch up with the size of China's 12 trillion-U.S.-dollar bond market, market players offered recommendations.

"First, the big liquidity gap between the onshore bonds and offshore bonds is hard for index investors to have reasonable exposure on each tenor," said Toshinobu Chiba, chief portfolio manager in fixed income investment at Nissay Asset Management.

"The second thing is that investors need to take forex before buying bonds, which is called pre-funding. It will waste two to three days before having Chinese exposure, I also recommend improving the restriction.

"The last thing is tax, the three-year exemption is not enough for long time investment, we need to confirm the continuously tax exemption.”

Michael Wittich, managing director at Standard Chartered Bank, gave his take on the reform priorities going forward.

"A lot of foreign managers want to see more liquidity around the hedging. The second is the connectivity, because most of the real money players, including BlackRock and Fidelity, want to see it. And the third is the global custodians and readiness to actually participate in this market. The connectivity is the final leg of the race," said Wittich.

Foreign investors hold 2.3 percent of issues in China's bond market at the end of 2018, far lower than in other countries.

Thanks to schemes like Bond Connect, net foreign inflow in China's bond market reached 100 billion U.S. dollars in 2018, accounting for 80 percent of the foreign capital inflow in entire emerging markets.

With the expected inclusion of Chinese bonds in the Bloomberg Barclays Global Aggregate Index starting in April, enthusiasm for Chinese bonds is set to grow.