It is not just physical supply chains that are being reconfigured, Covid-19 is also accelerating a shift in the pattern of global investing. As central banks in the developed markets continue to keep benchmark rates at zero or negative, global investors who are hungry for returns are streaming into East Asia, more specifically China. A decoupling of geopolitics and global investing may be underway.
April 2021 data from China Central Depository & Clearing, the market infrastructure for Chinese government bonds, recorded foreign institutional investors’ ownership totalled 3.22 trillion yuan (US$500 billion), an increase of nearly 65 billion yuan compared with March 2021 and 11.8% from the total at the end of 2020 of 2.88 trillion yuan.
Foreign institutional investors’ (FII) activity in the onshore bond market mirrors the same steady inflow into China’s onshore equity markets. Year-to-April 2021 data showed inflow of US$21.7 billion, with April 2021 data of US$6.3 billion, more than 117% more than the total for March 2021. “India and China are clearly the most preferred markets of FIIs,” explains Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas. “Over the past 10 years (seven years for China, since the Stock Connect became operational), we don’t notice any sustained period of FII selling in these markets.” With the Covid-19 spread recently in India, however, he points out that FIIs are selling in India and buying in Korea and Taiwan.
China’s inflow into the bond market is being driven by index inclusion. FTSE Russell became the latest adding Chinese government bonds to its much-tracked World Government Bond Index over a period of 36 months from October 29 2021. Estimates suggest an inflow of over US$100 billion. Indeed, from less than 842.5 billion yuan in June 2017, when the Bond Connect scheme was launched, foreign holdings have grown by 280% to end-April 2021. By 2030, the size of foreign holding in China’s bond market could be as much as 10 times the level today.
At the moment, however, foreign holding as a proportion of China’s bond market size of 117 trillion yuan at the end of March 2021 is a mere 3%, even though it is now the world’s second largest. In contrast, foreign holding of US treasuries, the world’s biggest market is above 35%; 30% for Indonesia; and 25% for Malaysia.
While return and diversification are factors at play for foreign investors entering China’s bond market – more than 100bp upside for comparable government bonds relative to 10-year US treasuries – the recent spate of defaults is a concern. Foreign investors have tended to reflect the implicit guarantee behind issues from state-owned enterprises. The noise surrounding credits such as Huarong Asset Management, a state-owned distressed debt asset manager, which delayed the release of its earnings for 2020, is indicating the government’s intention to allow market forces to play a bigger role.
As China continues to open up, it is also seeing increasing number of issuers starting to offer green, social and sustainability bonds. Given all these developments, The Asset Events+, in association with Credit Suisse and Moody’s Investor Service, is pleased to be hosting a discussion forum at the 16th Asia Bond Markets Summit, China Edition, on New Rails Toward a Green Recovery.
Sharing insights at the Summit are Vanessa Chan, investment director, Fidelity International; Jessie Tung, vice-president, senior credit officer, Moody’s Investors Service; Chi Lo, senior economist, Greater China, BNP Paribas Asset Management; and Yifei Ding, senior portfolio manager, fixed income, Invesco. Charles Firth, managing director, markets, Asia Pacific, at Credit Suisse will deliver the opening remarks.
To register for the Summit, please click here.
