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StanChart sees big change coming for China bonds

Chinese onshore bonds could be included in global benchmark indices as soon as this year, said Carmen Ling, Standard Chartered Hong Kong global head of RMB solutions for corporate and institutional banking.

Since the State Administration of Foreign Exchange announced in May that overseas institutional investors are allowed trade on the China interbank bond market (CIBM) without quota restrictions, “many have shown interests in participating and some have already started the trading,” she told FSA.

Ling belives the CIBM direct access has features that tick the boxes for typically skeptical foreign investors looking at China.

“For private sector investors, it is now very easy for them to access the China interbank bond market. There are also no specific restrictions on capital repatriation.”

Still, most investments by foreign investors are now hedged to get rid of the currency risks, she added.

The hedging cost is around 2%, while the Chinese treasury bond currently yields about 2.8%.

“[Netting the hedging costs], the yield is relatively attractive compared to countries with negative interest rates.

“It’s also a matter of diversification. There’s no reason not to include the world’s second largest economy in the portfolio.”

More inflows?

Bond holdings by foreign investors reached RMB 764bn ($115bn) as of June, according to data from the People’s Bank of China website. It accounts for merely 1.5% of the onshore bond market totalling RMB7.5 trn or about $1.12trn.

“So far the capital is flowing into government bonds. But because we expect in the coming three-to-six months that some global benchmark indices could include China onshore bonds, we do not rule out [investor] interest in corporate bonds.”

Although the renminbi is still not freely floated and has downward pressure, she believes that the currency is not likely to hinder global bond index inclusion.

“The most important factor is the flexibility for the capital to move in or out, whether there are any restrictions, and whether the process is convenient or not.”

A 10% foreign participation in the onshore bond market would equal about $50bn of new inflow, according to HSBC GAM.

A 7% allocation to China by the flagship benchmark indices translates to $3-3.5trn of inflow into the China fixed income market, UBS said earlier.

According to China consultancy Z-ben Advisors, the first batch of six foreign institutional entities were granted approval to access the CIBM.

They include the New Development Bank set up by the BRIC countries, the International Finance Corporation under the World Bank, Russia’s state-run bank VTB, the Hong Kong Monetary Authority, Korea’s Samsung Securities, as well as E Fund Management, a Chinese fund house.

Ling also mentioned that more capital inflows are likely to come after October 1, when China’s currency is officially included into the IMF’s special drawing rights basket of currencies. Inflows into onshore bonds from big institutions and sovereign wealth funds are expected, she said.

Before the CIMB initiative, most institutional investors could only invest in the bond markets using assigned quota under the RQFII or QFII schemes, which allow onshore investments via offshore RMB or foreign currency, respectively.

Part of the Mark Allen Group.