Chinese government bond trade proves profitable for foreign fund managers using Bond Connect to take advantage of yield difference

Fund managers using the Bond Connect have been profiting from swapping dim sum bonds into higher-yielding onshore bonds

At US$15 trillion, the world’s second largest bond market gives investors in government bonds higher yield than those issued offshore

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In January alone, China’s onshore bond market recorded a net inflow of 120 billion yuan (US$18.6 billion) from foreign investors. Photo: EPA-EFE

Published: 9:00am, 26 Feb 2021Updated: 9:00am, 26 Feb 2021

Fund managers have been profiting from a popular trade done via Hong Kong’s cross-border investment link into mainland China’s vast US$15 trillion bond market, taking advantage of the higher yields of onshore bonds as compared to their offshore equivalents.

The trade, carried out via the Bond Connect scheme, has been popular among managers active in China’s domestic bonds as well as so-called dim sum bonds – those issued in offshore yuan in Hong Kong. It comes as the Chinese bond market draws in record foreign investment, managers and bankers say.

In January alone, the onshore market recorded a net inflow of 120 billion yuan (US$18.6 billion) from foreign investors, up from an average of 70 to 80 billion yuan per month last year, according to bankers. Some of this influx has been channelled through the Bond Connect mechanism, which enables managers sitting in Hong Kong to access both markets with ease.

Investors watching the two markets are turning a profit by selling their dim sum bonds issued by the Chinese government, and then using the proceeds to buy the higher-yielding onshore equivalent via the Bond Connect link, managers say.

China’s central bank (pictured) and Hong Kong’s de facto central bank are working to expand the Bond Connect. Photo: EPA-EFE

The opportunity arises from the outperformance of dim sum government bonds. The limited size of the market – just US$9.5 billion in new issuances last year – often means demand for these bonds outstrips their supply. That compares to the far bigger onshore bond market, where new issuance last year totalled 48.5 trillion yuan (US$7.5 trillion), data from Refinitiv and the People’s Bank of China shows.