What is this
China needs to develop viable capital markets that provide a safe place to park long-term investments as its population ages and funding pensions becomes a national priority. Renminbi-denominated onshore bonds are important and becoming more so.
Policymakers also want to create an alternative source of funding for borrowers, relieving the burden on bank loans and avoiding an unhealthy concentration of risk within the banking sector. That’s why China’s nascent bond market – the Communist government issued its first bond in 1981 – has been forced to grow up fast.
There are two key markets: the China Interbank Bond Market (CIBM) and the Exchange Market. Some 90 per cent of all domestic bonds are traded on the CIBM, which boasts the highest trading volumes. Bonds traded here include central government bonds, central bank bonds, policy bank bonds, financial bonds, enterprise bonds issued by state-linked firms, local government bonds, medium-term notes and commercial paper.
The Exchange Market refers to bonds traded on stock exchanges, which account for the lion’s share of the balance of bonds in the domestic market. These include government bonds, enterprise bonds, medium-term notes and corporate bonds. The rapid growth in issuance of corporate bonds in recent years has helped boost transaction volumes on exchanges.
Local investor base
Local investors dominate this market and China’s banks are the biggest holders of domestic bonds. For example, nearly 67 per cent of outstanding Chinese government bonds and some 63 per cent of paper issued by the country’s policy banks, were owned by the commercial banks, according to data compiled by Wind, a Chinese financial information provider.1 Policy banks are government-controlled lenders that finance government-directed investments.
So if a key reason for developing a domestic bond market is to spread risk away from the banking sector and to place it in the hands of other investors, a lot more needs to be done before this goal is achieved.
Asset managers are becoming increasingly involved in the market and investment funds are the largest holders of corporate bonds. The anticipated growth of pension funds holds great potential for fund managers. Demand for domestic bonds will grow, along with a broadening of the investor base, as the financial industry develops more products for savers.
Who are the investors?
Chinese government bond investors* Others include Trust cooperatives: 0.7%, Securities firms: 0.6%, Non-bank financial institutions: 0.3% Source: Wind, 8 Dec 17
Policy bank bond investors* Others include Securities firms: 0.7%, Clearing houses: 0.5%, Non-bank financial institutions: 0.3%, Retail investors: 0.1%, Non-financial institutions: 0.1% Source: Wind, 8 Dec 17
Few foreign investors
Foreign investors – mostly central banks – account for just over 2 per cent of the domestic market, with investments focused around the same government and policy bank bonds favoured by China’s commercial banks.
This underrepresentation is a legacy of past policies that imposed complicated registration requirements on foreign investors, capped the size of their investments via quotas and restricted their ability to repatriate profits.
That’s why most foreign investors stayed away, while the providers of major international indices – including the JPMorgan Government Bond Index-Emerging Markets Global Diversified, the FTSE World Government Bond and the Bloomberg Barclays Global Aggregate Bond – excluded this market because of capital controls that engendered concerns around the repatriation of profits.