Three in One
Unlocking China's Bond Markets

Mike Hugman and Wilfred Wee

Evolution of China’s Capital Markets

Currency Volatility Primary issues of offshore renminbi bonds hit a high in 2014 despite currency volatility.

China’s capital markets are currently going through a period of monumental change. Their gradual liberalisation is opening the door to massive foreign participation, while the deepening of the offshore and onshore bond markets could witness a multi-decade shift in global asset allocation. At present, China’s RMB36 trillion (US$5.8 trillion) bond markets are under-represented in global fixed-income portfolios in relation to their size due to access restrictions for international investors. But foreign investors are likely to increase their allocations given the interest in renminbi-denominated assets as Beijing lifts limits on bond purchases.

The deepening of the offshore and onshore bond markets could witness a multi-decade shift in global asset allocation.

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Foreign access to the onshore bond markets is still restricted, and foreign institutions own less than 3% of China’s onshore debt issues. Although foreign institutions such as central banks are hungry for renminbi-denominated bonds – onshore government bonds yield over 2% more than developed market peers – disclosure requirements and investor-protection mechanisms in China’s domestic market still need improving and may present substantial risks.

The offshore US-dollar- and renminbi-denominated debt markets are unrestricted. These issues have long provided an opportunity for investors to harness attractive yields, particularly in the current low-rate environment in the US and Europe. The depth and liquidity of these markets means that offshore bonds tend to have less attractive yields than the onshore issues, although this is becoming less pronounced as access to the onshore markets is extended.

There’s an opportunity for investors to harness attractive yields, particularly in the current low-rate environment in the US and Europe.

Past performance is not a guide to the future and investments carry a risk of capital loss. Investment in mainland China may involve a higher degree of risk of financial loss when compared to countries generally regarded as having more developed legal, political, economic and/or other systems.

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