Europeans drawn to high yields in Chinese bond market

As mainland banks dump onshore bond holdings due to tight liquidity, European investors with fresh offshore yuan quotas are queuing to enter the market.

After London and Paris were each granted 80 billion yuan (HK$110.5 billion) quotas to buy mainland onshore equities or bonds, most European fund houses are preparing to structure products investing in the world's third-largest bond market, which is valued at more than US$4 billion. It experienced its first bond default last month.

"The bond market in China is attractive compared to Europe, where 8 per cent yield from corporate bonds is almost impossible," said Andrea Cattaneo, head of asset manager solutions at BNP Paribas Securities Services, the world's largest custodian service provider for fund managers outside the US.

"If you look at other emerging markets like Brazil or Russia, interest rates are close to 10 per cent, but the currency volatility has beaten the fund performance. So that's why European investors are looking at Asia with much more interest.

"There are a lot of big insurance companies and pensions who are looking for long-term investment and feel that they can afford [the risk] with just 1 to 2 per cent exposure to China in their portfolio."