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China's US$ 9 trillion bond market opens to foreign investors

May 18, 2017 (China Knowledge) – The latest announcement from the PBOC to allow direct foreign investment of its bond market via Bond Connect Program is a significance step in liberalizing China's financial markets. Continuing and expanding from the HK Shanghai Stock Connect that allows foreign investors to trade the equity market in Shanghai Stock Exchange via HKSE will ultimately see the free-float of Renminbi which currently has some restrictions and set quota. 


The China bonds market is expected to reach US$ 14 trillion by 2020, as the People’s Bank of China continues to drive supporting policies for the opening up and development of the bond market. According to China Knowledge Press's 800-page report on “China Fixed Income Market”, the Chinese bond market will overtake Japan as the second largest in the world soon.


Huge investment opportunities will arise for foreign investors due to larger quotas granted for Qualified Foreign Institutional Investor (QFII), Renminbi QFII and other schemes that allow inflow of foreign funds. Especially, the treasuries which offer higher returns when compared to U.S and Japan. As of last December, foreign institutions had invested a total of RMB 1.98 trillion in the China interbank bond market, and China Knowledge expects an unprecedented RMB 4 to 7 trillion of bond investments for their China's portfolio.


The Chinese government is now gaining traction of RMB internationalization. With the inclusion of the Renminbi in the SDR’s basket of currencies this October, China Knowledge estimates that up to US$1 trillion foreign funds would flow in China’s bond market. As IMF's MD Christine Lagarde puts it: "the RMB in the SDR basket is an important milestone in the integration of the Chinese economy into the global financial system." Furthermore, Singapore has recently included RMB as part of its Official Foreign Reserve, further recognizing the acceptance of RMB assets in the global portfolio of institutional investors.


Despite the concerns of China’s occasional interference in the markets, it has proven resilient during financial crisis time and again. “The central bankers around the world credited the Chinese government for its prudent management of Renminbi during the U.S. Subprime Crisis and subsequent Fed's QE programs" says Charles Chaw, Managing Director of China Knowledge.


The report also offer readers many other areas of investment opportunities in the country's burgeoning municipal, convertible and green bonds. The markets are also seeing increasing trading of bond repo, interest rate swaps and related derivatives to allow broader risk management for its fixed income and money markets.


Besides investments, these growth also create large employment and business opportunities for foreign firms in the accounting, audit, legal, rating agency, and fund managers to list a few.

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