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Chinese fixed income includes a range of instruments and has recently undergone significant advancement. As international investors have become more familiar with China's offshore fixed-income market, here we focus on the lesser known onshore market that's denominated in renminbi (RMB).

What are the options?

Similar to other markets, there are broadly three types of issuers in the China onshore bond markets: governments, banks and corporates. Bonds issued by governments and policy banks are named “rates bonds” by local investors, whereas bonds issued by commercial banks and corporates are called “credit bonds”.

The key difference is that rates bonds are considered to have minimal credit risks, with a significantly lower risk weight for bank investors. Others include medium-term notes, commercial paper, enterprise bonds and corproate bonds in the exchange market.

China onshore bond market composition
Figure-1
Source: Wind, Invesco. Data as at April 26, 2019.

Why consider?

The Chinese bond market is the third largest globally after the US and Japan, with a valuation at nearly US$13 trillion*. 

Compared to its peers in the Global Aggregate Index, Chinese bonds have offered a higher yield and much lower correlation with other fixed-income markets in the world. A key factor driving international investors’ demand for China rate bonds (including government and policy bank bonds) has been their more attractive yield relative to government bonds in other major markets.

*Source: Bloomberg, as at March 29, 2019.

Chart 2
CGB refers to China government bonds, CDB refers to China Development Bank bonds, which are considered as central government risk and traded as rate products. Past performance is not a guarantee of future results. Source: Wind, Bloomberg, as of April 30, 2019.
Renminbi is growing in global significance

With increased global trade comes a stronger need by major trading countries to have alternative arrangements for trade settlement. This creates structural demand for alternative global currencies, among which the RMB is an increasingly popular choice. This should help ease currency risk for RMB-denominated fixed-income securities.

Low exchange-rate volatility

While many international investors have expressed concern over foreign-exchange risks related to RMB-denominated assets, it's worth noting that the RMB has historically shown to be less volatile compared to emerging-market currencies^. 

Deep liquidity

Trading liquidity in China onshore rates bonds is comparable to those of many major developed and emerging markets. Liquidity of policy bank bonds and banks’ certificates of deposits (CDs) is particularly notable, with monthly trading volume of over RMB200 billion (US$30 billion) through China Bond Connect (as at Sept 30, 2019).

Diversification benefits

Driven by China’s relatively independent monetary policy and proactive macro oversight on the economy and markets, RMB bonds have low correlation with other markets. In both the investment grade and high yield segments, this is at about 0.1 to 0.2 with US corporate bonds, and less than 0.1 with Euro corporate bonds*.

International ratings

S&P Global recently won the approval from China’s government to start rating domestic bonds, and we believe Moody’s and Fitch are likely to follow suit. Domestic bonds will now be rated according to international standards, helping foreign investors familiarize themselves with the Chinese corporate bond market.

^Source: "The Renminbi’s Ascendance in International Finance", Eswar S, Prasad. Published in "Policy Challenges in a Diverging Global Economy" by the Asia Economic Policy Conference and the Federal Reserve Bank of San Francisco in November 2015.

*Source: Bloomberg, Invesco, Jan 14, 2014 to Dec 31, 2018, weekly.

Liquidity Of Bond Classes

BOND CLASS

DAILY TRADING VOLUME (RMB)

BID-OFFER SPREAD

TYPICAL TICKET SIZE (RMB)

MARKET LIQUIDITY (1 – 5, 5 BEST)*

Rates bonds

China government bonds

75 bn

1 – 5 bps

10 – 50 mn

4

Local government bonds

17 bn

5 – 10 bps

10 – 50 mn

4

Policy bank bonds

210 bn

0.5 – 3 bps

20 – 50 mn

4

Bonds issued by commercial banks

Non Convertible Debentures (NCDs)

210 bn

1 – 5 bps

50 – 200 mn

5

Financial bonds

6 bn

-

10 – 50 mn

1

Bonds issued by corporates

Medium Term Notes (MTNs)

30 bn

5 – 10 bps

10 – 50 mn

3

Short term Commercial Paper / Commerical Paper (SCPs/CPs)

30 bn

4 – 8 bps

10 – 50 mn

3

Enterprise bonds

6 bn

5 – 10 bps

10 – 50 mn

2

Source: Citic Securities, Invesco, as of April 2019. *Market liquidity rating is determined by Citic Securities.

Key takeaway

The increase in accessibility to the China bond markets should allow global investors more ways to harness the diversification benefits. Issuers also should have better means to price their capital more efficiently.

Ways to access

Foreign investment in Chinese fixed income markets has previously been constrained by various structural restrictions. Things are changing, though: in 2016 the People’s Bank of China took steps to open the China Interbank Bond Market (CIBM) to international investors, and in 2017 simplified foreign access via Bond Connect.

There are currently four channels for overseas investors to participate in China's onshore bond market.

The Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) schemes allow selected global institutional investors to invest in China’s RMB-denominated capital market including stocks and bonds. China promised in September 2019 to lift restrictions entirely for both schemes, though it’s still unclear when the changes would take effect.

The CIBM and Bond Connect differ in where business takes place: under Bond Connect, account opening, trading and settlement can be conducted in the offshore market (our local market), while under CIBM, the whole process is completed onshore.

 

CIBM DIRECT

BOND CONNECT

Account opening

Onshore account opening with China Central Depository and Clearing (CCDC)/Shanghai Clearing House (SCH)/China Foreign Exchange Trade System (CFETS).

Offshore account opening with Hong Kong’s Central Money Markets Unit (CMU).

Registration

Registration with PBOC through settlement agent bank. Must be done at product level for fund managers.

Registration with PBOC through BCCL. Could be done at company or product level.

Investment quota

No quota, but investment is subject to registered amount indicated by investors.

No quota is imposed or indicated.

Trading platform

OTC trading with agent bank who trades on investors’ behalf on CFETS, and also on Bloomberg Terminal.

International platforms such as Tradeweb and Bloomberg Terminal.

Eligible products

Cash bonds, FX derivatives, onshore interest rate derivatives.

Cash bonds in primary and secondary market, FX derivatives.

Source: Invesco, as of Sept 30, 2019
Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

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