Foreign fund managers plan to double their investments in renminbi-denominated bonds in the next year, according to a survey that suggests appetite for China’s vast debt market is rising in spite of fears about the country’s financial stability.
Investors polled by Deutsche Bank said they planned to double their allocation in the next year to about 13 per cent of their local currency portfolios, following moves by China this year to open its bond markets — the world’s third-largest behind the US and Japan.
Outstanding onshore bonds are currently worth about $7.5tn, roughly the same as the rest of the entire emerging-market debt universe, analysts have calculated. The US bond markets are worth $35tn and Japan’s $11tn.
China’s opening of its debt market in May allows international investors to buy onshore bonds under the auspices of a so-called agent bank appointed by the government rather than having to seek approval for an investment quota under a set of rules known as QFII.
The changes represented a streamlining of the investment process for foreigners, and a willingness by Beijing to ease tight controls by delegating approval. About 20 banks are agents including HSBC, Standard Chartered and Deutsche Bank.
“Now that access has opened up substantially for offshore investors, we expect foreign participation in China’s domestic bond market to accelerate and for onshore renminbi bonds to be an increasingly important component of major global fixed-income investors’ portfolios,” said Michael Ormaechea, head of Deutsche Bank’s global markets unit in the region.
More than a quarter of survey respondents had already filed for registration or were selecting an agent, while a further 40 per cent were currently looking at the opportunities.
Bankers have been reporting rising interest from fund managers in the relatively high yields on offer in China. Ten-year Chinese government bonds, for example, currently yield about 2.7 per cent, compared with 1.6 per cent for equivalent US sovereign debt. Japanese and German government bonds offer negative yields.
Now that access has opened up substantially for offshore investors, we expect foreign participation in China’s domestic bond market to accelerate
– Michael Ormaechea, Deutsche Bank
China’s appeal is also sharpened by the limited links its debt market has with global market moves. Onshore bond indices have shown a correlation of only 0.2 — where 1 would mean they move in tandem — with other emerging market local currency bonds and a link of just 0.13 with US Treasuries, according to a study by Invesco, the fund manager.
One catalyst for faster investment by foreign investors would be the inclusion of China in international bond indices, which would force index tracking funds to buy onshore debt. Four-fifths of those surveyed by Deutsche expect that to happen in the next two years.
However, earlier this year onshore equities were turned down for inclusion in MSCI’s benchmark global equities indices partly because foreign buyers were concerned about their ability to repatriate investments on demand. It’s a worry also raised by bond investors.
The survey also highlighted longstanding concern over the risks of investing in China. Just over 40 per cent of those polled said they were uncomfortable with the stability of the financial system. However, less than a third were worried about the risk of a sharp depreciation in the renminbi — fear of which sent global markets into a tailspin in January.