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Treasury & Capital Markets
Why Bond Connect brings China a step closer to internationalizing its currency
China’s bond market is no longer a policy issue, but has become an operational issue
Bayani S Cruz 16 Nov 2017

SINGAPORE – Investment in China’s bond market is no longer a policy issue but has become an operational issue with the opening of the Hong Kong-China Bond Connect moving it a step closer internationalizing its currency.

“China has been the third-largest bond market in the world but foreign holdings are still very limited. The macro reason for the Bond Connect is to develop China's bond market. Investment in China is no longer a policy issue, but is now an operational issue,” says Zhou Zhaoping, vice president, FIC product development of the Hong Kong Exchange, at The Asset 12th Asian Bond Markets Summit held at the Conrad in Singapore.

The Bond Connect also moves China closer to internationalizing the renminbi, something that is essential for the overall development of the Chinese market.

“China's long-term goal is to internationalize its currency and to do that by investment in local bonds. When more foreign investors invest in the onshore market, Chinese bonds will be included in international indices,” says Ng Sing Chan, head of APAC business organization, Fitch Ratings.

There is also a big demand for Chinese onshore bonds among foreign investors which the Bond Connect can help to meet.

“On the first day, most of the Bond Connect flow was from China-associated investment firms. Now we're seeing a big demand from international accounts,” says Kelly McKenney, head of distribution for Asia (ex-Japan), Tradeweb.

The Bond Connect provides the infrastructure that will allow more foreign investors to invest in China onshore bond market. However, returns on onshore bonds may be an issue for offshore investors.

“We have the infrastructure and the channels that are more accommodative for foreign investors, but we need to look at the returns,” says Sean Chang, head of Asian debt investment, emerging markets debt team at Barings.

To further develop China’s bond market for foreign investors, however, there is a need for an established rating system that meets global standards.

“China is a huge market. There is a need for a rating system that is comparable globally. The more foreign investors understand the market, the more they'll be able to invest,” says Ng of Fitch Ratings.

“Without a reliable credit reference, we have to rely on our own assessment of onshore bonds,” says Arthur Lau, co-head of emerging markets fixed income and head of Asia Pacific ex-Japan fixed income at PineBridge Investments.

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