China opens its bond market to foreign investors

Move gives access to US$9.7 trillion in Chinese debt

China’s bond market is officially open for business to foreign buyers.

On Monday morning, to coincide with the 20th anniversary of the British handing over control of Hong Kong, a bond-trading link between mainland China and Hong Kong kicked off. Bond Connect is the latest market link between Hong Kong, a global financial centre, and mainland China, where authorities have slowly been lowering barriers to foreign investments in recent years.

Greater access to the world’s second-largest economy is something the United States, Europe, and the rest of the developed world have demanded from China in recent years. Now, investors have access to US$9.7 trillion in Chinese debt; it’s the third-largest bond market behind the United States and Japan. Bonds worth US$1 billion were purchased Monday.

Even if the liberalization move is welcome, it is limited. For now, it’s a so-called northbound scheme, meaning foreign investors have access to Chinese bonds, but Chinese investors don’t yet have access to bonds traded in Hong Kong. (The idea is to keep capital in the country, rather than encourage capital flight.) And for now, only overseas institutional investors such as banks, insurers, brokerages and investment funds can purchase Chinese debt. Retail investors can’t buy Chinese debt like they could scoop up an American treasury bond.

Still, the move was welcome by Standard Chartered’s John Tan, head of financial markets for Greater China and north Asia.

“The launch of the Bond Connect marks the strong commitment of the Chinese government to further open up its markets,” Tan said. “We are positive that the scheme will be well-received by the market and report good momentum when it is launched.”

Yields on Chinese bonds are relatively high, considering the strength of its economy; its 10-year treasury note yields about 3.6 per cent, the highest among the biggest economies (all Chinese debt, from its one-month bond to the 10-year note, has a similar yield.) Right now, a comparable note in the United States yields 2.3 per cent.

“Chinese Treasurys certainly offer a premium to say, developed market sovereigns, with a very stable currency,” Brendan Ahern, chief investment officer at KraneShares, said when the bond scheme was announced earlier this year.

Investors on Wall Street have long been clamouring to get in on the Chinese debt game. In March, Rick Rieder, global chief investment officer of fixed income at BlackRock, told CNBC that potential demand for the product is “tremendous.” He said major bond indexes are “probably going to include Chinese debt.” Bloomberg has said it will launch two fixedincome indexes that include yuandenominated Chinese bonds.