Access improves for foreign investors

The Chinese bond market has seen increasing channels for investment by foreign investors, according to Fitch Ratings.

Foreign investors held around 2 percent of total domestic bonds outstanding as of the end of 2018, mostly central government bonds, up from 1.5 percent at end-2014, said its latest report.

"Regulators have been improving market access for foreign investors," said Zhang Shuncheng, its associate director of China corporate research. "The latest move was the cancellation of quota limits on QFII and RQFII in September."

Foreign investors are able to invest in the Chinese bond market through four main channels: the Qualified Foreign Institutional Investors (QFII) scheme, the RMB Qualified Foreign Institutional Investors (RQFII) scheme, China Interbank Bond Market (CIBM) access for long-term investors, and the Northbound Trading Link via the Bond Connect program.

China's State Administration of Foreign Exchange announced on September 20 this year that it would remove the quota limits on QFll and RQFll schemes, along with the restrictions on countries or regions, to further open up the domestic capital market to foreign investors.

The Chinese bond market, the second-largest in the world, has drawn increasing interest from foreign investors as being "too big to ignore," the report said.

Quite a few global bond indexes — including Citi's Emerging Markets Government Bond Index, the Asian Government Bond Index and the Asia Pacific Government Bond Index, as well as Bloomberg Barclays' Global Aggregate+ China Index and the Emerging Market Local Currency Government China Index — have included China's central government bonds. 

This will encourage global asset managers to gain exposure to the Chinese bond market, according to the report.

Higher onshore interest rates have been one of the main attractions for foreign investors, it pointed out.

For instance, China's 10-year central government bond yields have stayed above US 10-year treasury yields by 121 base points on average since mid-2010 (unadjusted for currency movements), although the spread had narrowed to 50 bp by the end of 2018 from around 150 bp a year earlier. 

Meanwhile, the onshore corporate bond market has become more diversified in terms of sector distribution over the past four years due to lower regulatory entry barriers for issuers, Zhang said.

There was issuance from 124 sectors at the end of 2018, including some emerging sectors such as data processing, health-care technology and Internet retail.