China courts global investors with bond market tweaks

{"text":[[{"start":8.88,"text":"Beijing is stepping up efforts to attract foreigners to its sovereign debt by building out futures contracts and other bond market infrastructure, but some investors warn that China’s economic challenges could deter them from committing to long-term allocations."}],[{"start":23.64,"text":"In June the People’s Bank of China, the central bank, launched a renminbi repo facility for foreign central banks, while the Hong Kong Stock Exchange this week rolled out Chinese government bond futures. At the same time LCH, one of Europe’s largest clearing houses, has started to accept offshore renminbi-denominated CGBs as collateral."}],[{"start":44.64,"text":"The moves follow a decision in April to grant access to China’s onshore bond futures to qualified foreign investors."}],[{"start":51.76,"text":"“In general, [Chinese authorities] are listening. This is something investors are asking for, and they are granting new tools,” said Stephen Chang, a portfolio manager at Pimco."}],[{"start":61.82,"text":"In particular, said Terrence Pang, a portfolio manager at Fidelity, “the CGB futures [market] will be extremely useful as it matures” because it would make it easier for investors to manage risks across the Chinese yield curve."}],[{"start":75.12,"text":"However, many investors say decisions on whether to buy CGBs hinge not on market access or liquidity, but on the slowing pace of China’s long-term economic growth and its corollary, a rising ratio of debt to GDP."}],[{"start":null,"text":"

"}],[{"start":88.32,"text":"“In terms of market access, we already have all the opportunities on that front,” said Leonard Kwan, portfolio manager of the T Rowe Price dynamic emerging markets bond strategy, adding that “a repivot towards faster growth” would help boost the appeal of owning the country’s debt."}],[{"start":104.16,"text":"With about Rmb44tn ($6.5tn) of CGBs outstanding, and a larger amount of debt issued by local governments and other institutions implicitly backed by central government, China’s bond market is one of the world’s largest debt pools."}],[{"start":119.88,"text":"But international ownership remains low. Data from China Bond Connect — which facilitates foreign investment in mainland China’s bond markets through Hong Kong — shows that foreign ownership has dropped from a peak of about Rmb4.5tn in 2024 to about Rmb3.2tn today."}],[{"start":null,"text":""}],[{"start":137.36,"text":"Beijing’s moves to build out its bond derivatives markets are part of broader efforts to encourage international adoption of the renminbi by making it easier for renminbi-denominated bonds to be held as reserve assets."}],[{"start":150.36,"text":"But IMF data shows that the share of renminbi assets among global official reserves remains stubbornly low, at less than 2 per cent."}],[{"start":159.76,"text":"Fraser Lundie, head of fixed income at Aviva Investors, said that given worries including a debt-to-GDP trajectory that is “deteriorating faster than most [developed market] peers”, investors would need “real conviction that policy rates are heading meaningfully lower” to justify an investment."}],[{"start":177.02,"text":"He added that liquidity and the development of the local derivatives market “haven’t been the swing factor for us” in taking an allocation in China."}],[{"start":185,"text":"Nevertheless, Chinese government bonds have outperformed the sovereign debt of other major economies as haven assets during recent periods of market stress, such as those brought about by President Donald Trump’s tariffs on US trading partners and his war on Iran."}],[{"start":null,"text":""}],[{"start":200.4,"text":"At 1.7 per cent, China’s 10-year bond yields are the lowest among major bond markets, having tumbled below Japan’s last year as the price of the debt rose. Some investors argue that China’s ability to dodge the waves of inflation from soaring supply chain and energy costs afflicting other economies has given its bond market a growing claim to be a reliable portfolio counterweight to equity markets."}],[{"start":225.68,"text":"Pimco’s Chang said the biggest source of appeal for investors holding Chinese bonds was their low correlation with other global bond markets."}],[{"start":234.66,"text":"“China hasn’t really sold off much. It is stable. China is still giving you a much calmer market for defensive purposes, for diversification. Other markets have been quite correlated with the US or the oil price,” he said."}],[{"start":246.8,"text":"“I think it’s a huge opportunity for the Chinese, particularly at the current juncture,” said Eric Lonergan, head of macro at investment firm Calibrate Partners. “If I were the Chinese authorities, I would say we can now claim to be the world’s safety asset.”"}],[{"start":262.4,"text":"However, he argued that Beijing would need to continue its efforts to improve liquidity and open up the bond market to back that up."}],[{"start":269.6,"text":"Rohit Verma, head of Asia-Pacific at LCH, said Beijing was delivering “the building blocks of a mature fixed-income market”."}],[{"start":278.44,"text":"“All the international players are trying to do more business in Asia. Demand for clearing overall, and with counterparties in the region, is growing,” he said."}],[{"start":288.32,"text":"However, he added, while there was significant interest among Chinese banks and their Hong Kong affiliates to use onshore CGBs as collateral, global demand remains low."}],[{"start":299.56,"text":"“That’s where I would say it’s early days,” he said."}],[{"start":306.54,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1785979955_4023.mp3"}