The coming of age of China’s bond market
Record low interest rates and regulatory reforms help lure international investors
23 Nov 2020 | 

Investors are emerging from the volatility of the Covid-19 crisis looking to capitalize on new investment opportunities and seeking superior alpha. Chief among these is the China bond market, which has steadily become a beneficiary of China’s financial liberalization and remains largely untapped by international investors.

China’s domestic bond market is a US$16 trillion behemoth and as of August 2020, it has grown to be the second largest in the world. In September, foreign investors bought Chinese bonds worth about 140.5 billion yuan (US$21 billion), making it the sixth straight month of increase in bond holdings and the 19th consecutive month of foreigners increasing Chinese government bond holdings, according to Bloomberg data. Foreign investor holdings of Chinese government bonds reached 9.4% as of end-September and its ownership of China’s interbank bond market has reached over 3% – with strong growth potential.

On its own and by size, China’s domestic bond market dominates more than half of all emerging-market fixed income but make up only a small fraction of global portfolios. Major international benchmarks have been phasing in China’s inclusion. Analysts estimate that the recent inclusion into the three major indices provided by Bloomberg, JP Morgan and more recently FTSE Russel, will see another US$250 billion of inflows into China’s bond market.

As it moves from infancy and under-representation into progressive maturity, opportunities will arise for global investors as the market grows in sophistication. We are in fact witnessing a “coming of age for China’s bond markets”, where relatively young markets are taking major steps for growth.

This evolution is being driven by three key factors.

The first is persistent record low interest rates, which have encouraged long-term institutional capital and private wealth to seek diversification and alpha. International investors can achieve a yield of approximately 3.2% on a 10-year Chinese government bond, while a US Treasury equivalent will yield less than 0.8%.

Secondly, we are seeing new strategic partnerships emerging and moving at a pace that will extend the internationalization of China’s financial markets. As a liquidity information provider for offshore investors, Bloomberg plays a key role in this liberalization. We recently worked with the China Foreign Exchange Trade System (CFETS) to introduce a new electronic trading service for CIBM-Direct on the Bloomberg Terminal. Such offerings will bring greater efficiency and market transparency to facilitate global investor trading of Chinese bonds with onshore market makers.

The third driver is key regulatory reforms and the ongoing internationalization of the renminbi (RMB). With greater transparency, regulatory improvement and positive economic fundamentals, China’s capital markets are becoming increasingly attractive to offshore investors. We are seeing policymakers in China pursuing wider market development and improved access not only in the country’s bond market but also across derivatives, ESG and fintech.

Impacts on RMB internationalization, China sellside and electronic trading

While the renminbi currently does not have the international status enjoyed by the dollar, euro or the sterling, continued capital inflows and strong foreign demand in Chinese assets will drive the Chinese currency’s internationalization. Portfolio managers believe that a more liquid bond market, coupled with foreign participation, will boost China’s standing as a global creditor.

The development of China’s bond market is going hand-in-hand with the domestic market serving international clients through improved research offerings and stronger liquidity. We have also seen new levels of professionalism with the China sellside. While China is traditionally a market with a buyside mentality, we are seeing growing sophistication in their sellside offerings.

For investors, active management is critical in navigating risk. China has witnessed an explosion in capability and availability of electronic trading platforms, analytical tools and greater automation, which are resulting in better efficiency, deeper liquidity and improved market infrastructure.

As a solution provider, Bloomberg has had to step up its role in the coming of age of China’s bond market. We are delivering robust electronic platforms for offshore investment, which broadens the investor and dealer network, and offshore investors interested in China are taking advantage of our full suite of enterprise products and data.

Earlier this month, we completed China's inclusion into the Bloomberg Barclays Global Aggregate Index. Inclusion in the index has marked a major milestone in the investability of the bond market. Chinese securities now represent about 6% of the index, and local currency Chinese bonds will be the fourth largest currency component after the dollar, euro and yen. We also launched the Liquid China Credit Index, which is the first global index that captures investment grade corporate bonds in China. We hope this new index will help global investors better understand China’s credit market.

Looking ahead, we expect to see the next stage of growth in China’s bond markets result in enhanced and healthy competition with international market makers on the global stage. Despite today's unpredictable global climate, China continues to open up its financial markets, presenting enduring opportunities for global investors and Chinese financial institutions. 

In times of great challenge, there is also great opportunity for the bold to achieve real change and progress. The coming of age of China’s bond markets is a powerful example of what is possible.

Bing Li is head of Asia-Pacific at Bloomberg L.P.

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