China opens up government bonds to foreign investors

25 Feb 16

The People’s Bank of China has announced the removal of quotas in the country’s bond market, which will open up government-issued bonds to foreign investors.

The removal of the cap on capital inflows, as well as ending requirements for investment approval, will give commercial lenders, insurance companies, securities firms, asset managers, hedge funds and charities free access to the world’s third-largest bond market.

Rajeev De Mello, head of Asian fixed income at Schroders, said global investors would welcome the news because it gives them a chance to increase their holdings in the region. In particular, it was likely to lead to an increased interest in Chinese government bonds, which are some of the few worldwide that provide a positive yield.

This would allow China to draw in more money despite the country’s economic growth slowing to its lowest rate in a quarter of a century, De Mello added.

However he noted the Chinese economy is not out of the woods yet. Expectations of sharper currency depreciation were resulting in high implied yields, which issuers do not want to pay, while buyers are worried about volatility.

“We believe that as operation details are spelled out, bond index providers could start including Chinese onshore bonds in global indices. This would also attract global investor interest.

“Nevertheless, uncertainty around the currency policy remains one of the larger hurdles for foreign investors. However, this should be resolved as the year progresses and would then be a signal to increase investments in Chinese government bonds.”

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