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Emerging Perspectives

Bond ambition: China forges ahead

24 January 2019
Author: Wilfred WeePortfolio Manager

With China’s bond market on track to become second in size only to the US, what do investors need to know? Wilfred Wee recently attended the China Bond Market International Forum in Beijing. Here he shares his key takeaways.

A growing force in bond markets

Senior figures from the People’s Bank of China (PBOC) gathered in Beijing last week alongside representatives from the country’s Ministry of Finance, the IMF and leading market index providers, to reflect on the future for Chinese bonds.

China is on course to become the world’s second largest market after the US.

According to the PBOC, China’s bond market grew to 86.4 trillion yuan (US$12.6 trillion) outstanding by the end of 2018. At the current rate of market deepening and economic growth, China is on course to steal the runner up spot from Japan and become the world’s second largest market after the US. China’s bonds are becoming harder for investors to ignore and the Chinese authorities appear to be as long on ambition as they are short on compromise.

Desiring a bigger role on the global stage

One thing came across loud and clear at the forum: China is very keen to get a proper seat at the fixed income table, and soon. The prize China is eyeing most keenly is having its bonds added to the Bloomberg Barclays Global Aggregate Index. This could be a game changer for the country’s bond markets, opening them up to vast sums of capital and bringing various benefits associated with increased market efficiency.

In his keynote speech, PBOC Deputy Governor Pan Gongsheng was keen to point out that China has done a lot of leg work to make the grade, reforming and developing its bond markets and meeting the three pre-requisite conditions that Bloomberg Barclays had stipulated. But Bloomberg cited a lack of preparedness by industry participants, such as global custodians, as among factors behind a possible delay to what had been planned for April 2019. In our view, the index inclusion process may be slightly delayed or could still begin in April, albeit with tiered inclusion factors conditional on further improvement to market liquidity and operational access.

China has taken significant steps towards creating an easier route in for foreign investors.

Keen to improve access for foreign investors

China has also taken significant steps towards creating an easier route in for foreign investors. Foreign access channels (such as CIBM Direct and Bond Connect) have been improved or expanded. And global investors can now trade onshore Chinese bonds via a Bloomberg terminal. The appetite for growth is understandable: at the end of 2018, foreign investors accounted for only 2.3% of China’s interbank bond market and 8.1% of Chinese government bonds1, these are low figures compared with many other countries.

More liquid, more open to scrutiny

In recognition of an Achilles’ heel, China’s Ministry of Finance outlined its plans to improve secondary bond market liquidity by issuing fewer new bonds while tapping existing ones. And the PBOC’s bold broader market reform agenda speaks of a genuine desire to shift to a new era in bond markets. Plans include: promoting bond index products such as bond exchange-traded funds; increasing connectivity between domestic and international central securities depositories; supporting the needs of different settlement cycles of foreign investors; and optimising the arrangements for foreign investors to conduct foreign exchange hedging for bond investments.

Plans for the credit market are equally wide-reaching. Crucially, they envisage a key role for overseas rating agencies – the three major ones have already established legal entities in China – with more, and more relevant, rating industry regulation and enhanced cross-jurisdiction regulatory cooperation. Taken together with steps to strengthen legal enforcement and improve the disposal mechanism of defaulted bonds, it is not surprising that the Chinese authorities seem to view their country’s bonds as sitting more comfortably among their developed market peers than in the emerging markets category.

Our experience of investing in China’s onshore bond market over the past four years leads us to a similar view: these securities resemble their developed market peers a lot more closely than many market participants assume, and the resemblance is rising. With Chinese bonds set to join the major international indices soon, we look forward to helping a growing body of investors to tap into to this widening opportunity.

China’s ambitions are bold and its momentum with bond market reforms impressive.

China’s ambitions are bold and its momentum with bond market reforms impressive. China’s bonds deserve serious consideration by investors, in our view.


1Source: People’s Bank of China, January 2019.

The value of investments, and any income generated from them, can fall as well as rise.

Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Important information

This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein.
All rights reserved. Issued by Investec Asset Management, January 2019.

Wilfred Wee
Wilfred Wee Portfolio Manager

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