Global demand rising for bonds on better yields and stable currency

Rising foreign investment in China's vast domestic bond market may prompt policymakers to consider further opening-up in the onshore market to realize greater capital inflows.

Foreign holdings of Chinese bonds in the interbank market surged to 1.15 trillion yuan ($179.95 billion) by the end of April, an increase of 49.34 percent from a year earlier and 18.4 percent from December, according to data from China Central Depository and Clearing Co Ltd.

Relatively higher bond yields and the stable exchange rate of the yuan have bolstered foreign investors' confidence in fixed-income instruments, especially when they are looking for safe havens amid turbulence in the emerging markets.

China's $28.2 billion deficit in cross-border goods and services trading during the first quarter has also pressured the authorities, to some extent, to explore more ways to maintain balanced international payments, said experts. It was the first quarterly deficit in 17 years.

Ma Jun, director of the Center for Finance and Development in Tsinghua University, who is also a former central bank chief economist, told China Daily that policymakers are considering how to further facilitate entry into the onshore bond market, including simplification of approval procedures.

Further opening-up of the country's bond market, the world's third-largest, could attract more foreign funds and offset capital outflows if the yuan weakens, Ma said, adding that it is a "basic and inevitable" move following the national strategy of financial sector opening-up.

"If the three most influential global bond indices could include China in their tracking baskets, as some foreign institutional investors expected, more than $700 billion worth of foreign capital could eventually flow in," said Ma. Investors of exchange traded funds who track those indices would passively buy in the constituent bonds of a certain proportion.

JPMorgan Government Bond Index－Emerging Markets and Citigroup World Government Bond Index, two of the top-three major bond indices, will conduct their annual assessments in the second half of this year, with China already on the watch list.

Several criteria will be examined before the inclusion. The indices usually require the local debt market to reach investment grade, the currency should be freely tradable, convertible, and hedgeable, and the capital market should be liberalized.

On March 28, New York-based Bloomberg LP decided to include Chinese yuan-denominated government and policy bank securities in the Bloomberg Barclays Global Aggregate Index. After a 20-month period starting in April 2019, yuan-denominated bonds will become the fourth-largest currency component following the US dollar, euro and yen within this index basket.

Huang Yiping, a member of the central bank's monetary policy committee, said that although the onshore bond market has expanded into the world's third-largest just behind the US and Japan, foreign investment accounted for only 1.6 percent in the market last year.

"Though we opened the bond market in 2016, foreign investors are still wary, which is surprising," said Huang.

The People's Bank of China, the central bank, allowed most types of foreign institutional investors to invest in the interbank bond market from February 2016, and removed the investment quota in March 2017.

By the end of April, 65 foreign central banks, international financial institutions and sovereign wealth funds had entered China's interbank bond market. In addition, 304 overseas institutional investors, including commercial banks, insurance companies, securities companies, fund management companies and other asset management institutions, have already invested in the onshore bond market, data from the China Central Depository and Clearing Co Ltd show.