Highlights from the August report

  • The internationalization of China’s $8 trillion bond market continues at a steady pace on the back of tangible efforts to liberalize the onshore investment environment. Onshore government bonds will now be included in a selection of major regional  indexes, such as Citigroup’s Emerging Markets Government Bond Index (EMGBI), Asian Government Bond Index (AGBI) and Asia Pacific Government Bond Index (APGBI). On July 3 China proceeded with the further opening of the mainland bond market via the long-awaited ‘Bond Connect’ programme, a Hong Kong link that provides foreign investors access to the country’s $9 trillion debt market, even if they lack an onshore account. The People’s Bank of China (PBOC) and Hong Kong Monetary Authority (HKMA) said that during the programme’s early stages flows would only go northbound from Hong Kong to the mainland.
  • China’s anti-leverage campaign continues. In May, the five-year sovereign yield was higher than that on ten-year debt, the first time the curve has inverted since 2006. At the same time, a number of stringent new regulatory measures introduced since the appointment of a new senior regulator in March, coupled with rising short term borrowing costs and growing fears of defaults, have increased the propensity for domestic banks to off-load short term bonds. In aggregate, Chinese corporate and government bond prices have decreased about 6 percent in the first half of 2017.
  • International appetite for Chinese debt may be diminishing, according to some media reports. For example, analysis of offshore RMB-denominated bond funds compiled by Morningstar reveals total assets under management shrank by roughly half in the past year to about $11.6 billion.

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