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China’s onshore bond market surged to new heights last year and got off to a strong start in 2021. With a neutral monetary policy and solid currency outlook, Standard Chartered expects that foreign investors will remain motivated to access China's capital markets, both through onshore and offshore channels, this year. 

China onshore bonds’ relatively attractive yields, good liquidity, and ongoing inclusion in global bond indices has resulted in a significant increase in interest from investors from all over the world, says Rose Kay, managing director and global head of China Opening and RMB Internationalisation for Corporate, Commercial and Institutional Banking at Standard Chartered, adding that China’s intensified efforts to open up its capital markets will continue to drive investment activity, especially in the bond market, which is already the world’s second largest. 

Fundamental factors driving foreign investors to increase their exposure to China’s capital markets include reforms allowing easier access via onshore channels, such as the Qualified Foreign Investor (QFI), and offshore channels, such as the Stock Connect and Bond Connect schemes. Last November, China’s regulators combined the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes into a single “qualified foreign investor” regime, which is aimed at further easing access to China’s capital markets by expanding the investment scope and relaxing the qualification requirements. Foreign investors now have access to a broader range of products in China’s Interbank Bond Market (CIBM) such as commodity futures and bond repo.

On 29 March 2021, FTSE Russell announced to include China Government Bonds into its flagship World Government Bond Index (WGBI). This follows the inclusion of China bonds in the Bloomberg Barclays Global Aggregate Bond Index and JP Morgan Global Bond Index – Emerging Market. “We estimate that the total passive inflows as a result of WGBI inclusion are likely to reach USD130-156billion”, says Kay.

As a proof of buoyant foreign investor confidence in China’s equity and bond markets, last year’s total transaction value of the northbound trading of Stock Connect schemes more than doubled that of the year before. Trading volume through the Bond Connect scheme also soared 83 per cent year on year, reaching 5 trillion yuan by end-2020. 

Foreign inflows into China’s onshore bonds exceeded 1.06 trillion yuan in 2020, more than double the previous year. In January alone, the onshore market recorded a net inflow of 120 billion yuan from foreign investors. That compares with a monthly average of 70-80 billion yuan last year. Standard Chartered expects foreign inflows to China’s onshore bonds to rise to a new high of 1.3-1.5 trillion yuan in 2021

For the whole year of 2020, inflows accounted for about 6 per cent of the overall market's net issuance. Foreign ownerships of China Government Bonds and Policy Financial Bank Bonds reached 9.7 per cent and 5.1 per cent, respectively, at end-2020. 

“International institutional investors from different jurisdictions are increasing their China bond investment. Central banks are also getting more active due to global reserve diversification into China. Hedge funds are another growing participants driving market activity. Not to mention the continued inflows from index tracking funds and real-money funds,” says Kay. 

Foreign inflows to China bond market set to rise to new highs in 2021

^{Note:
•    CGB - China Government Bonds
•    PFB - Policy Financial Bonds
•    NCD -  Negotiable Certificate of Deposit}

Over the years, Standard Chartered has actively participated in the opening of China’s capital markets and helped overseas investors participate in China onshore securities through channels such as Bond Connect, Stock Connect and the QFI initiatives.

“We are in a leading position to enable global investors access to China’s growing bond markets. As an active onshore bond trading dealer, we play an important role in maintaining market liquidity.” To support this proposition, Standard Chartered was granted a “Top Custodians” award (2018-2020) by Bond Connect Company Ltd and ranked number one among foreign banks in China for 2020 in terms of bond trading volume in Bond Connect.

China’s onshore equity market is also ranked the second largest in the world.“We have demonstrated our innovation for supporting clients to tap the China onshore equity market. We conducted the first stock borrowing deal in China by an international investor, right after the announcement of QFI relaxation permitting overseas investors to carry out securities lending and borrowing, Besides, Standard Chartered launched its market-first Master Special Segregated Account (SPSA) service in Stock Connect in 2020. It is an enhancement to the existing SPSA service to allow more efficient pre-trade checking to be conducted at a fund manager level.”, say Kay. 

The latest measures announced in the 2021-2022 Budget that aim to strengthen Hong Kong’s role as Asia’s bond trading hub by accelerating the Bond Connect scheme will create new momentum in the development of China’s bond markets, says Kay. 

“Down the road, we believe China’s policymakers will explore ways to harmonise different inbound and outbound investment channels, streamline the procedures, and further relax and expand the scopes. At the same time, we’ll proactively communicate with regulators on capital market opening to make these happen, while guiding our clients through the complexity of different investment channels.” 
 

Enhanced RMB FX services for Bond Connect investors
Last September, the China Foreign Exchange Trade System (CFETS) relaxed rules to allow Bond Connect investors to have multiple onshore RMB FX conversion and hedging counterparts. In March this year, the Hong Kong Monetary Authority (HKMA) issued the implementation guidelines. Before the recent reforms, investors could only conduct onshore FX conversion and hedging through their custodian banks. The new measure allows investors to achieve best execution by having the flexibility to get FX quotation from up to three banks. 

Standard Chartered is one of the first banks that offers this service now.