18 September 2017

Greater access to world’s second largest economy

At no point in China’s history have overseas investors had so much access to the country’s markets as they do today.1 This comes at a time when China has ambitions to internationalise its currency,2 liberalise its capital market3 and assume an even greater role in the global economy. 1

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China has been trying to entice global investors since the International Monetary Fund designated the Renminbi (RMB), an official reserve currency. 2 When you consider the size of China in equity 4 and bond markets globally, it’s still severely under-represented.5 This is a legacy from when there were government restrictions and exclusions from key benchmarks.

“If you think about a typical European or North American investor and their exposure to Chinese bond markets it's very small, typically one or two percent of their total exposure, that doesn't make sense in the long run. Investors are now thinking how long can I afford to not be exposed to this economy?” asks Bill Maldonado, Chief Investment Officer, Equities HSBC Asset Management at the recent HSBC China & RMB Forum.

Beijing wants foreign inflows to help stabilise its financial markets. However, by the end of last year, overseas investors held only $126.7 billion worth of Chinese bonds, which represents a mere 1.5 per cent of the total Interbank bond market.6 But attitudes towards these markets are shifting. China's bond market is the third largest in the world at $9.3 trillion.7 It’s stock market is the second largest.8

“The internalisation of the Chinese market is off to a good start. Investors are interested and Chinese companies want to tap into foreign investment capital. Local rating agencies are also off to a good start but we need more nuanced ratings, we need greater information flow, and we need that to be provided for a greater range of borrowers,” explains Steven Watson, Chairman of China Group, Capital Group.

Further opening up on the horizon

The long-term trend is to introduce more market driven forces to the Chinese economy, 9 as well as improved financial support to the real economy. 10 The country also plans to introduce a bond trading link between Hong Kong and the mainland by the end of the year. 11

“The China–Hong Kong Bond Connect announced by Premier Li last is another potentially important step towards fulfilling the massive potential of China’s onshore bond market,” explains Mr Gulliver.

This will allow Chinese bonds to be purchased with foreign capital. Investors won’t have to open accounts on the Mainland, but trade bonds via accounts in Hong Kong, where the movement of capital is much freer. Find out more here.

“There is also real interest in the Chinese government and policy makers to have capital markets. It serves a lot of social, political as well as economic needs.” explains Michael Falcon, Chief Executive Officer, J.P. Morgan, Asset Management, Asia. “We also see the Mutual Recognition of Funds between mainland China and Hong Kong as an important step in the opening up of markets and the democratisation of investments onshore.”

Reformed policy now enables investors to hedge their RMB exposure using onshore foreign exchange derivatives. 12 This should encourage greater convergence in the onshore and offshore exchange rates, and pave the way for China’s bonds to be included in global indices. 13

“The size of China’s bond market hardly matches up to its power in terms of GDP. Its GDP is about 15 per cent of the global figure, where its bond market size is only about nine per cent of the total, so we see potential for further development,” states Helen Wong, Chief Executive, Greater China, HSBC.


  1. President Xi's speech to Davos in full, World Economic Forum
  2. A Middle Ground, IMF
  3. China to open up like never before, Xinhua
  4. Will foreign investors bite at China’s Shenzhen link? Financial Times
  5. Wider crack in door to China bond market, Shanghai Daily
  6. Citi to include China bonds in its bond indexes, Reuters
  7. China Moves to Make $9 Trillion Bond Market Global, Bloomberg
  8. Market capitalisation of listed domestic companies, World Bank
  9. Renminbi not to stall on road to being market-based, Xinhua
  10. Rally as China Vows Support for Economy, Bloomberg
  11. China to consider cross-border bond link, Reuters
  12. China Opens Currency Derivatives to Lure Overseas Bond Investors, Bloomberg
  13. Surge of foreign buying builds case for China bond index inclusion, Financial Times


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