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Survey: international investors eye high quality onshore bonds

Half of global investors already have some allocation to China onshore bonds, and another 33% are considering doing so in the coming 12 months, according to results from an Asia Securities Industry & Financial Markets Association (ASIFMA) survey.
Fund Selector Asia

About 20% of respondents said they plan to increase China onshore bond exposure “significantly”, while 42% said they would “increase somewhat”. Only 1 respondent planned to cut exposure.

“There is still a lot of appetite to invest in China in spite of recent concerns about an economic slowdown, the depreciation of the yuan and market instability,” the report said.

The poll is jointly conducted by seven associations in September and October, involving more than 100 investors, with the majority being asset managers and banks. Among the respondents, 32% are headquartered in Asia, 39% in Europe and 25% in North America, and together they represent about $21trn of assets under management, according to ASIFMA.

Asset managers are slightly more bullish than banks in terms of boosting investments in onshore bonds, the survey showed. “The higher the investor’s AUM, the more positive is the investment expectation, perhaps reflecting the greater commitment to the region,” the report said.

The survey also showed that 21% of respondents are already using the China Interbank Bond Market to access the mainland bond market, after it opened up to all foreign investors in May.

Still, the majority of respondents (33%) said they are using the QFII scheme, in which quota is assigned for each qualified overseas investor.

In terms of preference on bonds, most investors favor central government-linked investments, which confirmed the trend of inflows into treasuries in the past few months. “The largest investors (with AUM of >$500bn) are more interested in investing in policy banks compared to smaller investors,” the report noted.

Technical issues are the biggest barrier for global investors who want to buy onshore bonds, the survey showed.

Barriers include rules on repatriation of invested funds and beneficial ownership, tax clarity, as well as free cross-border capital flows. One of the top macro-economic concerns is the lack of a “clear and stable government policy on financial markets”, the report said.

“Despite the fact that the Chinese government has accelerated efforts to attract more foreign investment, the market still lacks depth and there are a large number of remaining impediments for foreign investors that the government may wish to consider in order to fully open its capital markets,” ASIFMA noted in the report.

Some industry players believed it might take another year for onshore bonds to be included in global benchmark indices, which could attract billions in capital inflows.

Part of the Bonhill Group.