BOND funds have been attracting renewed interest among investors frightened by the recent volatility of global equity markets. A handy snapshot of investor behaviour can be seen in the September numbers from the Hong Kong Investment Funds Association. Funds overall experienced net inflows of US$30.64 million, but bond and cash funds enjoyed net inflows of $43.1 million and $44.3 million respectively. When the numbers were re leased, association fund chairman Desmond Chan said investors had turned to bond products because of the turmoil in equity markets. Many local investors will soon be investing indirectly in the Chinese Government through its bond funds. As a Chinese Government road show was under way to sell a new sovereign issue recently, Moody's Investors Services said it was reaffirming the mainland's A3 sovereign credit rating. The threat of a downgrade had loomed over the issue since September when Moody's put the rating on review, citing slowing exports and a fall in foreign direct investment. The current rating implies 'adequate' security but the potential for possible impairment in the future, according to Moody's. In reaffirming the rating, Moody's cited China's strong external position which would help limit pressure from 'structural weaknesses in the economy, regional financial turmoil, and a possible downturn in external demand for China's exports over the intermediate term'. Two other ratings agencies - Standard & Poor's and Fitch IBCA - also recently confirmed their existing ratings for China. The latest sovereign bond issue by China is expected to raise between $500 million and $1 billion in a 10-year issue, although it has been authorised to issue as much as $2.5 billion. Many Hong Kong-based bond funds have shown an interest in adding the China bond to their portfolios, depending on its pricing. An existing benchmark 10-year China sovereign bond due in 2006 now trades at about 200- 250 basis points (hundredths of a percentage point) over US treasuries. Speaking at a recent seminar, BNP Peregrine executive chairman Francis Leung, said, China was likely to rely more heavily on sovereign borrowing following the impact of the October closure of Guangdong International Trust & Investment Corporation (Gitic). The incident made it much harder for mainland local governments and enterprises to raise funds in international markets. According to Mr Leung, the Chinese Government was likely to use sovereign borrowings to fund local governments and companies in future. As a credit, China looks very solid compared to many other Asian nations. According to China's Vice-Minister of Finance, Jin Liqun, the country's foreign reserves stand at $144 billion. It is running a trade surplus of about $45 billion. Looking at its debt situation, China had outstanding external debt of about $138 billion at the end of last year, according to the World Bank. About $66 billion of the total was classified as private, $31.4 billion short term and $20.7 billion bilateral. Cumulative lending by the various arms of the World Bank stood at about $31.13 billion as of June 30, this year. Against this, at least $750 billion would be needed for infrastructure work over the next 10 years. Analysts have observed that there is no holding back the long- term development of the debt markets in the mainland, but there are certainly numerous challenges ahead.