China’s bond market is likely to expand considerably after Chinese regulators liberalise the bond markets in Chinese securities exchanges and expand bond connections between China and the UK.
“As the areas opened to foreign investors will be enlarged, we hold very positive expectations that the proposed measures will provide more convenience for foreign investors to invest in the China onshore bond market,” lawyers at the Baker McKenzie FenXun (FTZ) joint operation in mainland China told FinanceAsia.
China’s bond market is worth $13 trillion, making it the world’s third largest after Japan and the US.
Greater links between the UK and Chinese bond markets are in the cards following the recent 10th China-UK Economic and Financial Dialogue in London, which was attended by Chinese vice premier Hu Chunhua and British finance minister Philip Hammond.
In a joint statement, both sides said that they welcomed progress made by the UK-China Bond Connect Working Group. They also agreed to continue feasibility studies on the UK-China bond market connect arrangement.
China is encouraging British firms to issue Panda bonds – renminbi bonds issued by foreign entities in China – and British banks to develop their lead underwriting business for non-financial debt instruments in China’s interbank bond market. The UK would like China's ministry of finance to issue sovereign bonds and the People's Bank of China (PBOC) to issue renminbi-denominated PBOC bills in London.
Within China, Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC) is considering expanding channels for foreign investors to enter the bond markets. The CSRC wants to make it more convenient to issue Panda bonds on Chinese exchanges, he said.
China’s onshore bond market consists of two submarkets – the interbank market and bonds listed on the stock exchanges in Shanghai and Shenzhen. The latter accounts for only 10% of China’s onshore bond market.
The CDRC will work with other government departments on a provisional law regulating the issuance of Panda bonds within Chinese exchanges by foreign institutions. The law will clarify criteria for foreign issuers eligible to issue Panda bonds and resolve accounting issues.
“The raising of funds through Panda bonds helps to push the internationalisation of the renminmbi and promote Belt and Road,” said a spokesman for the CSRC.
The Belt and Road Initiative is China’s project to connect with other countries through infrastructure projects like ports and railways. As more foreign investors trade Chinese bonds, there will be more free-floating demand and supply for the renminbi, as well as more currency hedging.
In May, Portugal became the first eurozone country to issue renminbi bonds. It sold Rmb2 billion ($291 million) three-year Panda bonds at 4.09%. The deal was underwritten by the Bank of China and HSBC. Proceeds will be used for repaying government debt and supporting Belt and Road.
Panda bonds launched on China’s exchanges in December 2015. By the end of May this year, 24 issuers had issued Rmb123.6 billion of Panda bonds on Chinese exchanges, according to official Chinese data. Last year, 43 Panda bonds totaling Rmb74.6 billion were issued in the interbank market, while 15 Panda bonds totaling Rmb20.9 billion were issued in the exchange market.
Panda bond issuance fell 36% year-on-year to less than Rmb20 billion in the first quarter of this year, according to French bank Natixis. What is unappealing to Chinese investors is that the average yield of Panda bonds is lower than the general onshore market, it added.
Foreign holdings in Chinese onshore bonds increased to Rmb1.8 trillion by the end of last year from Rmb1.2 trillion at the end of 2017, according to Standard Chartered.
Foreign institutional investors currently account for 2.5% of China’s bond marke. This fraction is low compared with Europe, the US and Japan, implying room to open up the Chinese bond market further. In comparison, foreign holdings of the debt of the US, UK and Japan range between 25% and 30%.
Even without these proposed liberalisation measures, China’s bond market is expected to grow substantially, boosted by the inclusion of Chinese bonds in international indices.
Since Chinese bonds were added to the Bloomberg Barclays Global Aggregate Index in April, plus the widely expected inclusion of Chinese bonds and equities into FTSE and JP Morgan indices, China can expect to see benchmark-driven portfolio inflows of as much as $450 billion in the two to three years.