SINGAPORE  -  As 2016 draws to a close, the investment theme around China’s bond market should centre neither on optimism nor dread. Instead, discernment is encouraged among investors that plan to tap the world’s third largest bond market.

Speaking at The Asset 11th Asian Bond Markets Summit in Singapore today Gregory Suen, investment director, fixed income at HSBC Global Asset Management advised investors to neither be bull or bear with China’s bond market. “Be a chicken. Be selective,” was the advice as investors prepare to usher in the Year of the Rooster, a Chinese zodiac cycle, in 2017.

Given the uncertainty around China’s reform policies and recent bond defaults from Chinese corporates, investors must tread the markets carefully, says Suen. “Defaults are a natural progression for the market and lead to a better pricing of credit risk in the Chinese bond market,” he notes.

Suen tells investors to carefully evaluate strategically important companies that are likely to receive government support. Moreover, investors need to look at companies that fit into China’s “new economy” niche, these include technology and consumer related firms. Location as well should play a part in how investors look at China bond market. “In the US the coastal cities are very different to further inland, this is even more the case with China,” highlights Suen.

The key for China’s bond market going forward however is attracting foreign investors. Already China has begun opening up its onshore markets to foreign investors via pilot programmes on the CIBM (China Interbank Bond Market). “Access to external funding is very important for Chinese issuers,” states Suen. “Foreign participation is low in China though we expect it to slowly increase. Foreign investors don’t understand China as well, so they get caught up in the headlines.”

“China wants to be a strong powerhouse within the global economy, it’s important to open up the capital market for them to achieve that,” explains Suen. “Offshore Chinese issuance will continue to be significant in 2017, but the mix will be different. Probably more LGFVs (local government financing vehicles) or smaller issuers.”

To stay up to date with events on the ground please visit our live site by clicking here. Alternatively you can visit our Twitter page @TheAssetMag.