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China opens bond market to more foreign investment

China opens bond market to more foreign investment

When ranking the world’s countries in terms of size, China often holds one of the top three positions regardless of the data being measured. It is, for instance, home to the largest population, the second largest economy by GDP and the third largest bond market in the world. It is this last point that was the focus of the recent announcement by the Chinese government that the country’s $9 trillion bond market would now be accessible to overseas investors via the Bond Connect program with Hong Kong. Both corporate and government bonds are included in the program. This development is the latest in a series of measures by China to open its financial markets to greater foreign investment.

Bond Connect comes on the heels of 2016 reforms that loosened restrictions on the Chinese interbank bond market, allowing certain long-term foreign investors to buy Chinese bonds without being subject to quotas or license approvals. Prior to that, China and Hong Kong launched the Shanghai-Hong Kong Stock Connect scheme in 2014, which was further expanded in 2016.

The Bond Connect scheme is similar to Stock Connect in that it allows foreign institutional investors to trade Chinese securities on a Hong Kong exchange. However, while the Stock Connect scheme also allows Chinese investors to trade in foreign securities, this is not yet a feature of the Bond Connect scheme.

Total debt securities outstanding and total GDP for largest bond markets as of 2016 ($B)

Source: Bank for International Settlements and World Bank; data as of December 31, 2016 

As we can see above in the chart of the top five largest bond markets in the world, China’s is the only one that remains smaller than its GDP. In addition, only about 2% of the Chinese bond market is held by foreign investors, while in the US that number sits at about 30%.[1] This could seem to imply significant growth potential for the Chinese bond market as it becomes aligned with the other large bond markets of the world.

With the launch of Bond Connect, the ease of accessing Chinese bonds is expected to increase the liquidity of the instruments while providing additional capital to Chinese companies. In addition, the supply of Renminbi denominated assets held globally is expected to increase dramatically helping to integrate the Chinese economy with the global economy.[2]

For more on how FTSE Russell closely watches China, please see the China Indexes section of our website.

 

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 [1] http://data.worldbank.org/data-catalog/GDP-ranking-table

[2] http://www.bis.org/statistics/c1.pdf

 

 

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