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China onshore bond market could double to $30trn by 2030

Currency exchange board showing in a street at night.

China’s onshore bond market could almost double in size from approximately $16trn (€14.5trn) today to $30trn by 2030, according to Aberdeen Standard Investments (ASI).

Despite this potential expansion, Edmund Goh, investment director at the UK-based asset manager, told Expert Investor “foreign investors only own 2% of onshore China bonds today”. This compares with a bond share “between 18% and 60% in most developed markets”.

One reason, according to benchmark, analytics and data provider FTSE Russell, is that access to international investors is inhibited. While the Chinese bond market is the second-largest in the world, approximately 98.5% of China’s government bonds remain onshore and denominated in renminbi.

Fund flows

According to data provider EPFR Global, meanwhile, year-to-date emerging market bond fund flows indicate China bond funds have enjoyed above-average inflows (see graph below).

Source: EPFR Global, year-to-date flows to 16 September 2020

Cameron Brandt, director of research at EPFR, a part of Informa Financial Intelligence, commented that “China has been by far the most attractive market for fund managers with cash to allocate”. Investors have been rotating into China, which offers “the comforts of a recovery story and large foreign exchange reserves”, Brandt added.

Goh explained that investors were “more willing to consider China in the event that a second wave of infections in other parts of the world lead to lower yields in other markets”.

At the same time, he noted, ultra-loose monetary policy has driven down yield from sovereign bonds in developed markets: “German and Swiss 10-year bonds are in negative yield territory, Japan bonds are at zero while UK, French, Canadian, US and Australian government bonds are yielding less than 1%. In contrast, China’s 10-year bonds are yielding 3.15%.

“The People’s Bank of China, relative to other central banks, has committed to a more prudent monetary policy, showing significant restraints in expanding monetary base.” That said, Goh warned investors to carry out fundamental research before investing in China, given continuous governance concerns .

FTSE Russell WGBI inclusion

On Thursday, FTSE Russell will decide on the inclusion of China in the FTSE World Government Bond Index (WGBI), which could increase access to Chinese sovereign debt. Estimates from asset managers suggest China’s inclusion in the WGBI could increase inflows by as much as $140bn.

Other indices, such as the JPMorgan Government Bond Index-Emerging Markets and the Bloomberg Barclays Global Aggregate Index have already included Chinese sovereign bonds.

China bond ETF launch 

On Monday, Hong-Kong based investment managers CSOP Asset Management (CSOP) and ICBC Asset Management launched in partnership a China government bond exchange-traded fund (ETF).

The ICBC CSOP FTSE Chinese Government Bond Index ETF tracks the FTSE Chinese Government Bond Index (CGBI) and is listed on the Singapore Exchange (SGX).

Jessie Pak, managing director, FTSE Russell and head of information services, Apac, at London Stock Exchange Group, said the new ETF came “at a time of on-going financial reform in China designed to improve access for foreign investors”.

Loh Boon Chye, chief executive of SGX, said: “SGX provides a multi-asset platform that supports the internationalisation of China and investor access to Asia’s largest economy. Global fixed income investors have been turning to Chinese sovereign bonds for added diversification and yields, and this product is a strong addition to our platform.”

Elena Johansson

Senior Reporter

Part of the Bonhill Group.