Bankers and fund managers have welcomed the mainland’s decision to further open up its interbank bond market (IBM) to foreign investors, saying it will undoubtedly create more opportunities for foreign investment in the sector. At the same time, they called for further measures to expand access to the country’s onshore-debt market.
“The permission to allow greater access to the interbank bond market is very encouraging. It demonstrates that the PBOC (People’s Bank of China) is moving toward interest-rate liberalization and the opening-up of the domestic capital market,” said Cynthia Wong, head of Emerging Markets Asia Hong Kong and Singapore at Societe Generale.
At the end last month, the central bank had given the nod to 32 foreign organizations, including quota holders of the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) programs, as well as foreign central banks and overseas renminbi clearing and settlement houses, to participate in the Chinese mainland’s interbank bond market.
Regulated by the PBOC, the IBM generates more than 95 percent of the total trading volume of the onshore bond market last year, according to a Goldman Sachs report. The rest of the deals were in the exchange-bond market, which is overseen by the China Securities Regulatory Commission.
The Chinese mainland’s onshore bond market is the third-largest in the world at about 35 trillion yuan ($4.24 trillion), only after the US and Japan. However, foreign exposure is comparatively small. By end of 2014, a total of 211 offshore institutions had been allowed to participate in the IBM, while 180 of them have held 572 billion yuan of bonds, PBOC data show.
“It’s a cheerful piece of news to us,” Wong told China Daily. “Although we could always tap exchange-listed bonds, the liquidity and market depth are not adequate. With direct access to the interbank bond market, both transaction and information flows have been significantly improved. Being a member also helps to establish trading relationships with mainland counterparts.”
As at the end of April, Societe Generale had an aggregated QFII quota of $450 million, according to the State Administration of Foreign Exchange.
Wong said the IBM offers a much wider range of choices, in terms of credit quality, industrial names and duration of bonds. “Depending on clients’ risk appetites, we can tailor total return portfolios for them, which could include bonds, equities and derivatives.”
Manu George, Asian fixed income investment director at Schroders, said: “We see valuation in the IBM. It’s likely that the majority of our allocations would move to the Chinese IBM.” The UK fund house, with a 2-billion yuan RQFII quota, was also granted a license to operate in the mainland’s IBM.
“In terms of returns, the bond yield on the mainland is historically higher than equivalent markets around the world. From that basis, the mainland bond market is very cheap and attractive,” George said.
He added that Schroders has been participating in the new issuance in the market and government bonds auctions on a daily basis. It’s also enlarging the exposure to corporate bonds, with support from a self-owned research team.
“We’re still watching municipal bonds,” George said. “Some municipalities are well run with good revenue stream, management of financials and information disclosure. If pricing is attractive and meets our valuation criteria, we’ll definitely consider investment.”
However, the quota system might still be a concern, said Andy Seaman, chief investment officer of Stratton Street Capital, a London-based fund house also applying for market access.
“The onshore market is attractive, particularly from a European perspective. But most quotas granted are around $100 million, which is far from what global asset managers would need. I guess many of them probably would be reluctant to apply for quotas given the scale,” Seaman said.
“At this stage, the quota is reasonable for proving our ability in investing in China. Typically, some investors want to see a two- or three-year track record before they invest,” George said. “But, as more investors see long-term investment opportunities in the Chinese fixed-income market, we anticipate that the quota size will be enlarged.”
“Over the past few years, most of the interest has come from Asian investors,” said Jelle Vervoorn, managing director at HFT Investment Management, a joint venture of BNP Paribas Investment Partners and Haitong Securities.
“Recently, new funds have been devolved under the UCITS’ platform (Undertakings for Collective Investment in Transferable Securities Directives), opening up this universe to European clients.”
“As long as the mainland has not fully opened its capital account, the relative low correlation of Chinese onshore bonds with other global asset classes will probably continue to offer diversification benefits,” Vervoorn added.
“We find big institutional investors all around the world who are interested in Chinese onshore bonds, but they need more education,” George said. “The market has been closed for many years and people don’t know how it would perform under different market conditions. As it opens up, knowledge would accumulate and investors would get comfortable with it.”
Meanwhile, he also called for further liberalization of the mainland’s capital account. “Access to the onshore market is multi-layered. That adds to the cost of investing into the mainland as you are paying different people to do the same thing,” he said.
“As the market liberalizes, it will be easier and cheaper to trade because there would be less people in between. We hope that, in the next few years, the cost of trade will come down.”
“We are really excited about the proposed inclusion of renminbi into the SDR (special drawing rights of the International Monetary Fund). That will considerably increase global investors’ allocation to China which, currently, is very low,” George added.
“When that happens, clearly trading cost will have to fall because more competitors will offer cheaper prices among the increasing cross-border capital flow. Right now, the market is not big enough to breed more competition.”
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