YUAN BONDS
Across The Border
by

Better access to China’s bond market likely to lure international investors

Foreign ownership of onshore RMB denominated bonds accounts for just 2.4% - but analysts are predicting that’s now likely to rise.

PUBLISHED : Monday, 13 June, 2016, 3:42pm
UPDATED : Monday, 13 June, 2016, 3:42pm

The increasing levels of clarity surrounding the rules of access to China’s onshore bond market are likely to spark a significant rise in interest from overseas investors, according to analysts.

Foreign ownership still accounts for just 2.4 per cent of onshore RMB denominated bonds, despite the fact that since 2012 “China has virtually quadrupled approvals for some of its best-established investment vehicles, and has continued to accelerate approvals”, noted a recent white paper from Standard Chartered.

But with improved clarity surrounding new ways for overseas investors to access China’s onshore bond market, that level seems likely to increase.

One major development was the release on 27 May of detailed rules governing access to China’s interbank bond market (CIBM).

The People’s Bank of China announced it would alter the rules for foreign institutional investors looking to access the market in February.

Standard Chartered carried out the research for its white paper in March and April, and found 33 per cent of investors would consider using the new CIBM direct-access scheme, even though they were answering prior to the new, more-detailed rules being announced.

“Already you can sense that CIBM direct access is a game changer for asset managers, a ‘once in a generation’ shift that will eventually provide exposure to a new asset class of investment around the globe,” wrote Mike Wittich, greater China and north east Asia head, investors at Standard Chartered, in the paper.

CIBM direct access is a game changer for asset managers, a ‘once in a generation’ shift
Mike Wittich, greater China and north east Asia head, investors, at Standard Chartered

Kun Shan, head of local markets strategy, global markets, at BNP Paribas, said the new detailed rules to access the market, “will help create another channel for capital inflow, not only for foreign direct investment or the property market, but in the capital market”,

“Given the size of the onshore bond market, onshore investors are, in general, trading or investing in similar directions.

“New offshore professional institutional investors will help optimise the investor base and create a better pricing mechanism,” Kun said.

The new rules will also allow a greater variety of international investors to access China’s onshore bond market, added Eleanor Wan, chief executive officer at BEA Union Investment.

“Before this new initiative becomes effective, investor eligibility is restricted to central or RMB clearing banks, insurance companies or QFII or RQFII owners,” she explained.

Wan was referring to the qualified foreign institutional investor programme and the renminbi qualified foreign investor programme, which allow foreign institutional investors to invest in onshore bonds and equities in foreign currency and RMB respectively, up to an agreed quota.

“The new initiative will be open to most financial institutions, including funds and asset management companies,” she said.

“This is a significant step towards capital market liberalisation in China as the country’s bond market is the third-largest in the world, worth RMB 48 trillion (HK$56.76 trillion).”

Nonetheless, access problems have not been the only previous issues preventing overseas institutions from targeting China’s onshore bond market.

Augusto King, managing director and head of capital markets group Asia at Mitsubishi UFJ Securities, sees a number of different considerations facing international investors, such as identifying the credit ratings of Chinese bonds.

“Everything is either AAA or AA. It is hard to differentiate among various credits,” said King.

Other considerations exist around disclosure and corporate governance, and investment returns, given the depreciating currency and potential interest rate tightening, he said.

“The opening of the market is a good step. But these things cannot change overnight.

“Will the regulators make a conscious effort to create a more friendly environment to attract foreign investors?” he asks. “Do they have the experience or do they have the willingness to learn from other markets?”

The opening up of China’s bond market is also a step toward the further internationalisation of the RMB, added Shan from BNP Paribas.

“It will speed up or increase the number of onshore China bonds entering major global local currency EM [emerging market] indices,” he said.

“This is an important step for RMB internationalisation, as trading RMB-denominated assets around world is a crucial move.”

 

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