Angus To, ICBC International
At the end of August, foreign institutions held only 1.7% or $210m of China’s $11.7bn onshore bond market, according to data by the China Central Depository & Clearing Co.
“Across Asia, foreign ownership in local currency bond stands at 15% on average. It is estimated that it will take China around five years to reach that level,” To said.
Foreign buying should be supported by index inclusion. In March, Bloomberg revealed plans to add China’s RMB-denominated government and policy bank bonds to the widely-tracked Bloomberg Barclays Global Aggregate Index. They will be phased in over a 20-month period beginning in 2019.
In China, foreign investors can gain access to the domestic renminbi-denominated bond market via the Bond Connect programme as well as the China Interbank Bond Market (CIBM) scheme.
Between the two channels, To expects more institutional investors will switch to the Connect.
“More limitations exist in the CIBM channel, such as the quota and settling through a third-party bank or institution.
“Comparatively, the Bond Connect does not require onshore agencies to help execute and settle the order, which makes it less costly yet more flexible,” he said, adding that it is reasonable for more fund managers to shift to the Bond Connect.
Moreover, last month authorities clarified taxation on bond investment and delivery versus payment settlement, which eases foreign investor concern about settlement risk when using the Bond Connect, To said.
However, foreign investors remain selective and hold mainly securities with minimal credit risk, such as bonds issued by policy banks. This is mainly due to the difficulties in hedging corporate credit risk.
“As offshore investors are not allowed to participate in the credit default swap market on the mainland, there is no effective tool for them to hedge onshore credit risk,” he explained.
