HSBC's asset management arm is stepping up efforts to tap the mainland's onshore bond market, the fourth-largest in the world, but one still largely closed to foreign investors, as a key part of its strategy to take advantage of Beijing's sweeping plans to globalise the yuan.
Relatively higher yield and abundant liquidity has made mainland onshore debt a favoured asset class, especially to offshore yuan investors looking for greater returns than the low deposit rates offered by banks.
Foreign investors have been barely able to access the market, with only 24 trillion yuan (HK$30.6 trillion) worth of offerings due to tight capital control.
However, expectations of the doors widening are high after Beijing vowed to boost cross-border flows of the yuan and make it a global trade, investment and reserve currency.
"China is the world's fourth-largest bond market after the United States, Japan, and France," said Joanna Munro, Asia-Pacific chief executive of HSBC Global Asset Management. "It is an interesting story there in terms of its relative yield. One of the things happening is that this market is opening up and we are expecting bond issuances to carry on growing."
Standard & Poor's forecasts the mainland will surpass the United States as the world's largest corporate debt market for non-financial issuers within the next two years. The rating agency expects the debt needs of mainland companies to reach US$18 trillion by the end of 2017, accounting for a third of the forecast US$53 trillion in new debt and refinancing needs of global companies in the next five years.
HSBC Global Asset Management hopes to launch a fund investing in the onshore bond market in the first half of next year, through its newly obtained 800 million yuan (HK$1.01 billion) worth of quota under the renminbi qualified foreign institutional investor (RQFII) scheme, Munro said.
The company started investing in mainland offshore equities in 1992 and made its first investments through the qualified foreign institutional investor (QFII) scheme in 2003. It is now the world's second-biggest QFII manager by assets.
"China cannot be ignored," Munro said. "The scale of the market in China and the government's commitment to open up the capital market, means that investors, wherever they are, should take notice."
Yield of China's onshore notes is still generally higher than offshore - backed by robust debt demand. For example, the onshore five-year China government bond stood at about 4 per cent as of October, while offshore notes with the same tenor stood at about 3 per cent.
"One of the things we think is very important is that you have to be selective in investing … to make sure you choose the right issuances from that large market," said Munro.
Another initiative to take advantage of Beijing's currency liberalisation push could come from the approval of the mutual fund recognition scheme, which is expected to allow foreign fund managers to sell products on the mainland and vice versa.
"We already have a Hong Kong-domiciled platform with a range of funds on it, so we are well placed to benefit from this change," Munro said.
"Again, we need to see the final rules and this may not be something we can do in the early phases. But, for example, our joint venture has an RMB Money Market fund which could be interesting for non-local investors."