Trading China’s Bond Markets With Confidence
By Ee Chuan Ng, China Head of Sales for Bloomberg L.P.
In global markets currently characterized by political and economic uncertainty, China’s $9 trillion bond market presents a potential long-term investment opportunity for yield that is getting harder to ignore.
In the past, global investors have had limited exposure to Chinese bond markets, partly because of difficulty in accessing quotas to trade Chinese bonds and partly reinforced by a perception of the lack of transparency into the market.
All this however, is set to change as the world’s third largest bond market opens its doors to global institutions. Chinese government bonds are offering an increasingly interesting yield pickup against US Treasuries, in part driven by a deleveraging campaign that is causing yields to rise and credit spreads to widen. Further economic and financial reform could lead to market conditions that make it even harder for investors to stand on the sidelines.
In the past few years, China has taken concrete steps to accelerate the opening of its vast bond market, with moves to make its domestic bond markets global.
Foreign institutional investors can now invest directly into China’s burgeoning interbank bond market via agency banks in China. New rules have made it easier to access onshore currency hedging markets and regulators are also working to make tax requirements more transparent to foreign investors. The recent announcement by the People’s Bank of China and Hong Kong Monetary Authority on the framework arrangement of the Bond Connect scheme is encouraging, and a positive step in making Chinese bond markets even more accessible to investors in the CNH markets.
Due to the increasing accessibility to China’s bond market, Bloomberg launched two parallel global indices earlier this year which include China bonds, offering investors a new approach to analyzing China’s domestic bond market. We were the first index provider to include China bonds in a global indices offering.
In March this year, it was revealing that the majority (59%) of offshore market participants in Singapore we surveyed say they are actively exploring to invest in China’s bond market, while 29% say they are already investing in the market.
This shows us that international fund managers are starting to acknowledge that Chinese onshore debt is bound to become a big part of global fixed income portfolios in the medium to long-term.
Tools for Fixed Income Investment
With the inevitability of Chinese markets opening, global institutions today need to understand the opportunities and risk this market presents. To do this, they will need transparency into the prices of bonds, reliable yield curves, economic indicators, trading analytics and measures of credit risk.
Sophisticated bond investors may take this for granted, but the ability to bring all these together in a single, seamless workflow for a developing bond market such as China’s poses numerous challenges.
In response to this need, we recently launched the Bloomberg ‘RMB Bond Suite,’ giving investors around the world the gold standard in China fixed income trading and investing. We believe the RMB Bond Suite is the industry’s most advanced set of fixed income tools for onshore and offshore investors tracking China’s bond markets.
The suite brings real-time pricing data from Inter-Dealer Brokers in China as well as the China Foreign Exchange Trading System (CFETS) and presents them to any investor globally via a tried and tested platform. The localization further enables us to customize yield curves, trading analytics, calculators to analyse PBOC’s open market operations, comprehensive credit analytics and a full news service covering this market in-depth.
As investors eventually move beyond sovereign quality Chinese Government Bonds and Policy Bank Bonds and to credit markets, investors will be needing a powerful default risk model that can analyse the credit health of a company by estimating its default risk over a period of time. Only with these tools can a bond investor gain a deeper understanding of the risks and opportunities at hand.
Bloomberg’s heritage in fixed income has given us a rich understanding of how markets evolve and the essential tools investors need to enter a new market. These set of tools demonstrate how technology is helping to bring transparency to China’s markets, boost efficiency in bond pricing and liquidity and determine risk.
Assessing Risk & Opportunity
It is becoming apparent to investors that market access to China’s bond markets is no longer an obstacle. PBOC’s Deputy Governor, Yi Gang, spoke last month at Bloomberg’s New York headquarters, stating that China will cut red tape, help create more hedging instruments and simplify tax codes to lure foreign investors to the domestic bond market. His message was resoundingly clear – China is serious about opening up its bond markets and providing access to foreign participation – and more will be done to facilitate access and spur inflows.
With new tools like the RMB Bond Suite, over time, data transparency will also no longer be a barrier for global investors to enter China’s bond market.
That said, there may still be investors who will prefer to wait on the sidelines as they look for more concrete steps by China to increase access, improve transparency and stabilize the yuan.
Market factors driving investment decisions are constantly volatile, and we expect this to continue, but at the right time, a confluence of the right factors will produce conditions for outperformance.
Foreign investors – who only make up 1.3% of China’s bond market – are realizing that China fixed income will inevitably be a part of global asset allocation. New York-based Neuberger Berman Group is considering launching a private fund with a focus on bonds after Fidelity International became the first global asset management firm to do so in China earlier this month. Firms who get in early into China’s bond markets will stand to gain.
Many major market participants are beginning to seize the opportunity. And those who have the right tools of the trade are best positioned to capture the opportunities offered by the world’s largest untapped debt market.
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