The Cable

China Opens Its Bond Market To International Investors

Wall Street has long wanted to invest in Chinese debt.


China’s bond market is officially open for business to foreign buyers.

On Monday morning, to coincide with the 20th anniversary of the British handing over control of Hong Kong, a bond-trading link between mainland China and Hong Kong kicked off. Bond Connect is the latest market link between Hong Kong, a global financial center, and mainland China, where authorities have slowly been lowering barriers to foreign investments in recent years.

Greater access to the world’s second-largest economy is something the United States, Europe, and the rest of the developed world have demanded from China in recent years.  

Now, investors have access to $9.7 trillion in Chinese debt; it’s the third largest bond market behind the United States and Japan. Bonds worth $1 billion were purchased Monday.

Even if the liberalization move is welcome, it is limited. For now, it’s a so-called northbound scheme, meaning foreign investors have access to Chinese bonds, but Chinese investors don’t yet have access to bonds traded in Hong Kong. (The idea is to keep capital in the country, rather than encourage capital flight.) And for now, only overseas institutional investors such as banks, insurers, brokerages and investment funds can purchase Chinese debt. Retail investors can’t buy Chinese debt like they could scoop up an American treasury bond.

Still, the move was welcome by Standard Chartered’s John Tan, head of financial markets for Greater China and north Asia.

“The launch of the Bond Connect marks the strong commitment of the Chinese government to further open up its markets,” Tan said. “We are positive that the scheme will be well-received by the market and report good momentum when it is launched.”

Yields on Chinese bonds are relatively high, considering the strength of its economy; its 10-year treasury note yields about 3.6 percent, the highest among biggest economies (all Chinese debt, from its one-month bond to the 10-year note, has a similar yield.) RIght now, a comparable note in the United States yields 2.3 percent.

“Chinese Treasurys certainly offer a premium to say, developed market sovereigns, with a very stable currency,” Brendan Ahern, chief investment officer at KraneShares, said when the bond scheme was announced earlier this year.

Investors on Wall Street have long been clamoring to get in on the Chinese debt game. In March, Rick Rieder, global chief investment officer of fixed income at BlackRock, told CNBC that potential demand for the product is “tremendous.” He said major bond indices are “probably going to include Chinese debt.” Bloomberg has said it will launch two fixed-income indices that include yuan-denominated Chinese bonds.

Citi also plans to consider including mainland Chinese bonds in three government bond indices. Deutsche Bank is also considering products that include Chinese debt. Becky Liu, head of China macro strategy, said Thursday that she expects inflows of about $20 billion from a JPMorgan bond index inclusion and about $100 billion to $110 billion each for the Citi and Bloomberg-Barclays indices.

In 2014, Chinese launched a two-way stock trading link between Hong Kong and Shanghai with investors on both sides getting access to each other’s equities. A second stock link last year connected Hong Kong and the mainland’s second exchange in Shenzhen. Investors see Monday’s action as a continued step in the right direction.

“Bond Connect will be a catalyst for the continuing development and globalisation of China’s bond market, as well as reinforcing Hong Kong’s position as a leading international financial centre,” said Peter Wong, chief executive of HSBC Asia Pacific, a bank which made one of the first trades Monday.

Photo credit: BILLY H.C. KWOK/Getty Images

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