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FTSE Russell China Bond Research Report

Highlights

  • China opened its domestic bond markets in February 2016 to a wider range of international market participants to further liberalise the capital account and attract more foreign investment. But foreign appetite for domestic Chinese debt is still limited: Of the 48.8 trillion RMB ($7.5 trillion) in outstanding onshore bonds at the end of December 2015, international market participants held less than 2 percent, according to ChinaBond.
  • Wide discrepancies persist between onshore and offshore credit ratings as well as mainland and international approaches to risk evaluation. For example, the bond of a major Chinese property developer is rated B+ on fundamentals, but is afforded the top AAA rating by some onshore credit agencies. These differences may be dampening international enthusiasm for onshore bonds.
  • China’s policymakers are currently tasked with further explaining the tax rules that govern onshore bonds to make them more attractive to foreign market participants, who may not be fully informed of the regulations governing onshore investments. At the same time, some analysts suggest China should unify and consolidate the numerous onshore regulatory agencies to ensure legal consistency across the diverse mainland market.
  • The offshore RMB bond – or ‘dim sum’ – market continues to evolve despite significant setbacks in 2015 due to a rising number of missed payments among issuers and the sudden RMB devaluation in August. But a massive shift from the offshore to the onshore markets by international market participants is unlikely anytime soon, according to some analysts, especially as hedge funds and speculators are currently excluded from the onshore bond market opening.
  • In the last quarter, the bond market value of the FTSE China Onshore Sovereign and Policy Bank Bond 1 - 10 Year Index increased by 2.29 percent from 12,635,774 to 12,924,958 RMBm just before the December 2015 and March 2016 rebalances; whereas that of the FTSE-BOCHK Offshore RMB Bond Index decreased by 9.75 percent from 287,850 to 259,783 RMBm.


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