Global funds give China’s Bond Connect plan the cold shoulder

PUBLISHED : Friday, 11 August, 2017, 1:53pm
UPDATED : Friday, 11 August, 2017, 10:22pm

China’s invitation for global investors to invest in the country’s US$9.3 trillion bond market received a cold shoulder from institutional funds, as the first month of its pilot programme got off to a tepid start.

Foreign funds’ holdings of Chinese government and corporate bonds rose 40.9 per cent in July to 823.99 billion yuan (US$123 billion) from last year, according to ChinaBond data. A month earlier, the holdings were at 786.2 billion yuan. That means the net increase a month after the implementation of the Bond Connect programme was 37.8 billion yuan, or 4.8 per cent increase from before the channel was opened.

Explainer: What is Bond Connect?

“China’s bond market development is very new to the world so many investors still need time to make changes to allow Chinese debt to be included into their investible universe,” said Ng Kheng Siang, the Singapore-based head of Asia-Pacific fixed income investments at State Street Global Advisors, which has US$2.6 trillion of global assets under management as of June 30.

International funds make up less than 2 per cent of the holdings of China’s bond market, a tiny fraction compared with the average of 20 per cent to 30 per cent in other emerging markets like Indonesia. To facilitate international investments, China started the so-called Bond Connect plan on July 3, to allow foreign funds to access the interbank bond market from Hong Kong.

A month after its implementation, the plan had led to increased transactions, said Charles Li, chief executive of the Hong Kong Exchanges & Clearing Ltd., the market watchdog agency that implements the scheme.

Still, the growth is expected to be only incremental in the coming quarters, such as was the case with a similar programme called the Stock Connect, giving international investors access to China’s equities market.

To further attract funds, Chinese bonds need to be included among the major bond indices of the world, said State Street’s Ng.

Apart from the need to analyse the market from a investment value perspective, foreign investors also need to rigorously study a whole host of factors for compliance purposes ranging from trading to clearing and settlement, from legal to tax issues, said Sally Wong, chief executive officer at Hong Kong Investment Funds Association.

For example, the decision for fund mangers managing pension funds whether to allow China to be part of the investment universe may also depend on their own pension law or if there is any regulation governing that in their own country.

Investors may also hope to clarify of how the withholding tax of bonds should be paid through the scheme, Wong said. Real time settlement after a bond’s transaction would also be helpful, she said.