China bond market: Dawn of a new era
- As a centrepiece of China’s financial liberalisation, developing an efficient and open bond market has become a priority.
- Rapid growth in issuance has made China now the world’s third largest bond market after the US and Japan, while its credit market is second only to the US.
- Despite its already vast size, the bond market is set to grow further, reaching 120% of GDP by 2020 – a ratio that is still well below those of major economies.
- Until recently, China’s onshore bond market was closed to foreign investors. While they have increased in recent years, foreign holdings of RMB bonds still represent less than 3% of the market.
- To spur foreign interest, Beijing has made significant progress toward market liberalization by improving market access, streamlining regulations and increasing the diversity of instruments available for foreign investment.
- These efforts will make RMB bonds more eligible for inclusion in global fixed income indices – a move that could meaningfully change investor attitudes, and drive significant capital flows into the Chinese market.
- A strong pushback against investing in China bonds has been fears of persistent RMB depreciation. However,
- such concerns have been scaled back significantly lately.
- Our investment analyses suggest that RMB bonds compare favourably with other EM bonds in currency-adjusted
- yields, and can add significant value to adiversified bond portfolio in risk-adjusted returns.
Source: CEIC, WIND and AXA IM Research
China accelerates financial integration
China’s successful economic integration into the world has had a profound economic impact over the past few decades. However, its influence on the global financial market has been constrained by its closed capital account and non-convertibility of the Renminbi (RMB). Financial integration has therefore significantly lagged behind China’s economic interaction with the rest of the world...
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