China's bond market remains magnet for foreign investors

BEIJING - Buoyed by an upward trend in the economy and continued opening-up efforts, China's bond market has maintained its appeal for foreign capital despite lingering global financial volatility.

Overseas investors continued to purchase Chinese bonds from September to December 2023, with an increase of over $60 billion in net holdings, indicating the growing popularity of renminbi (RMB) assets, according to the State Administration of Foreign Exchange.

Although the US and European interest rate hikes made the yields of Chinese bonds less stellar, the Chinese bond market, the world's second-largest, has remained a magnet for foreign investors.

Ching Cheuk-hung, Senior Executive Vice-President and Deputy Chief Executive Officer of HSBC Bank (China) Company Limited, said the country's steady economic recovery, effective pro-growth measures, and accelerated economic restructuring have helped boost the attractiveness of RMB-denominated assets.

The correlation between Chinese bonds and European and US bonds is relatively weak, and purchasing Chinese bonds has become a necessary choice for more and more international investors, said John Tan, Standard Chartered head of financial markets in Asia.

According to a Standard Chartered research report, a more dovish US Federal Reserve, a better RMB outlook and the currency's rising international usage are conducive to bringing more foreign inflows to China's onshore bonds in 2024, and the number of foreign investors is likely to continue to rise.

The bond market opening-up has picked up pace since the beginning of this year. RMB treasury bonds and financial bonds issued by policy banks can be used as eligible collateral under the Bond Connect program, and all existing overseas institutions in the Chinese bond market are allowed to conduct repurchase business.

Analysts believe that the new measures will further enhance the attractiveness of China's bond market and help investors better manage liquidity and control capital costs, marking a step forward in market opening-up.

The Bond Connect program, launched in July 2017, is a mutual market-access scheme that allows overseas investors to invest in the Chinese mainland's interbank bond market.

By the end of 2023, overseas institutions held 3.72 trillion yuan (about $523.81 billion) of Chinese bonds, up 340 percent from the value before the launch of the program.

Moreover, China's National Association of Financial Market Institutional Investors has approved 10 more foreign-funded institutions, including HSBC and Standard Chartered, as lead underwriters or underwriters of debt financing instruments for non-financial enterprises.

Foreign investors mainly held treasury and policy bonds in China and their asset allocation of credit debts has much room for improvement, HSBC's Ching said.

Wesley Yang, Deputy CEO of Standard Chartered China, said the bank will help Chinese issuers achieve high-quality development through green bond issuance and will support the bond financing of micro, small and medium-sized enterprises.

Thanks to the country's bolstered economic momentum and expedited opening-up moves, foreign institutions have adopted a more optimistic stance toward the Chinese bond market.

China's financial opening-up is advancing steadily and beats expectations, said Samuel Fischer, Head of China Onshore Debt Capital Markets of Deutsche Bank, adding that the bank is optimistic about the development prospects and potential of RMB financing.

"As one of the first foreign banks fully licensed in China's interbank bond market, Deutsche Bank will continue to leverage our strengths to offer financing solutions to bond issuers with different credit backgrounds to tap into China's debt capital market," said Fischer. "We're committed to promoting the further opening-up of China's capital market and the long-term development of China's bond market."