“The total size of the China interbank bond market is $7trn, around half of which is government and policy bank bonds. Including policy banks, this makes China the third biggest government bond market in the world,” Robert Simpson, portfolio manager at Insight Investment, told FSA.
“Over time, we expect China’s bond market will become an important part of global bond allocations in the same way bond markets of other major economies are. In contrast to other major economies, the China government bond market offers positive real rates across the government bond curve,” Simpson said.
The People’s Bank of China officially announced the full opening up of the interbank bond market to offshore institutional investors in February with detailed rules governing how this might take place were released in May.
Before that, the mainland interbank market was tightly closed to the outside world with the exception of those who wee granted a quota under the Qualified Foreign Institutional Investors scheme.
The opening up of the China interbank bond market is another step along the liberalisation path of China’s financial markets, he said.
“The next main announcements to look out for are the inclusion of China government bonds in global and emerging market bond indices,” Simpson said.
Insight Investment manages assets of £440bn ($4.85trn).
HSBC enabled Insight’s registration with China’s regulators to invest in the market and will act as a settlement agent bank and custodian.
Cian Burke, global head of securities services at HSBC, said China’s continuous opening of its domestic bond market to foreign investors underpins the country’s determination to push forward its financial reform.
“The broader access and simplified process make it easier for overseas investors to tap into growth opportunities of the China interbank bond market, which is already the world’s third largest fixed income market,” Burke said in a statement.
However, the potential for bond defaults in China is a top concern among foreign investors. China has had more corporate bond defaults so far in 2016 than all of last year, FSA reported earlier.