China Opens $9tn Bond Market To Foreign Investors
Foreign investors have waited for Beijing’s Bond Connect scheme for a long time and now they will be able to buy and sell Chinese bonds.
China’s bond market, which is the third largest in the world, is worth $9 trillion but just 2 percent of these bonds are owned by foreigners.
The launch of the Bond Connect initiative comes at the same time as the 20th anniversary of Hong Kong being handed over to Chinese rule.
No date has been set for Chinese investment in foreign bonds but the Chinese bonds can be bought by fund managers, insurers and banks through Hong Kong.
An asset management unit of Bank of China as well as HSBC Holdings was the first to use the scheme to trade, having purchased bonds worth about $300m in early trading.
Investors will have greater access to investments denominated in the renminbi and yuan through this opportunity to buy Chinese corporate or government debts.
In the past, overseas investors have been careful about the Chinese market partially due to the instability of the Chinese currency and the slow pace of financial market reforms.
There have been considerable concerns about the reliability of the credit ratings for Chinese bonds.
Recently, similar initiatives have been launched to trade Chinese shares. Last year, foreign investors in Hong Kong began trading shares in about 900 companies on the Shenzhen Stock Exchange after the Shenzhen-Hong Kong trading link was officially launched.
This launch was subsequently followed by the inauguration of the Shanghai-Hong Kong Stock Connect in November 2014. This initiative enabled international investors to deal hundreds of A-shares listed on the Shanghai and Hong Kong exchanges.
Last month, the US stock index provider MSCI, included China’s domestic shares onto its index for emerging markets for the first time.
This move was also critical in allowing China to open up its financial markets and allow the flow of foreign capital.
For the last three years, MSCI rejected China’s inclusion primarily due concerns of accessibility for foreign investors and regulatory issues.
The MSCI is the biggest stock index provider in the world.
A-share belonging to 222 Chinese companies will be added to MSCI’s Emerging Markets Index but these only constitute of 0.7 percent of the MSCI’s value.
Currently, the MSCI Emerging Market Index is worth $1.6 trillion.