China’s bond market is too big to ignore

The sheer size of China’s bond market - the world’s third largest - is leaving global investors with no choice but to invest in this market

London, UK - The sheer size of China’s bond market - the world’s third largest - is leaving global investors with no choice but to invest in this market, say bankers and investors on Thursday at The Asset Asia Bond Markets Summit - European Edition in London.

“Thirty percent of the bond market outside of the US is China. You will need to invest in that market whether you like it or not,” says Jaswinder Sandher, head of debt capital markets centre (EMEA) for Bank of China.

The Chinese bond market’s massive size has drawn global investors to this market. In a sign of the market’s increasing global reach, the Chinese bonds have been included into the Bloomberg Global Aggregate Bond Index. The market’s potential to offer diversification and relatively strong yields are making it tough for global investors to ignore Chinese bonds.

For now, some international investors are biding their time, says Chris Iggo, chief investment officer and head of active fixed income for Europe and Asia at AXA Investment Managers. Going into the future, however, Iggo believes “bond connect will be the preferred option to access China”.

Scale and increasing access have helped drive interest in Chinese bonds. But Beijing continues with reforms to further open up its capital market.

For one, the PBOC is considering expanding the repo market to foreign investors, according to Echo Jiang, head of cross-border settlement centre at China Central Depository and Clearing, Moreover, “issuers like the MOF through government bonds already realize the liquidity issue and eye the reissuance of bonds,” she adds.

China is also taking the initiative to further support the private sector. Ariel Lei Yang, vice president for China Chengxin International Credit Rating, notes that liquidity is never an issue in China. “But investors are not buying in the private sector in particular. They believe more in LGFVs (local government financial vehicles) and SOE (state-owned enterprises) that have strong government support.”

Recent bond defaults involving some of the LGFV bonds, are keeping investor expectations in check and are now providing a more realistic picture of the market. Local credit ratings are also being strengthened.

“When you’re in China, you know you have to go through the domestic rating system,” says Daniel Widdicombe, head of investment banking, China Construction Bank (London).

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Date

9 May 2019

Channel

Capital Markets

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