China's large onshore bond market is becoming increasingly open and transparent and its entry into bond indices will have a big impact on index composition and, consequently, bond investing.
Historically, investors were largely only able to purchase US dollar-denominated bonds issued by the Chinese government and offshore bonds issued in renminbi ('dim sum' bonds). Now, however, the much larger domestic Chinese bond market has become accessible and is set to shake up bond investing. In May 2015, we reviewed Chinese equity market developments in 'All Aboard the Through Train – China A Shares'. In this note, we explore corresponding Chinese bond market developments.
China may have kept out of the headlines over the last year but the country remains an important focus for investors. Concerns are broad-based and embrace the Chinese economic slowdown, renminbi (RMB) devaluation, high corporate debt levels and high property prices. The potential market impact of these challenges should not be underestimated. Global equities dropped sharply in 2015 after the renminbi's devaluation in a tentative move towards an ultimately free-floating exchange rate.
Then again, in January 2016, concern over China's slowdown, driven by the re-orientation of its economy towards domesticled growth, caused further market panic. It is true that excesses have been allowed to build up in China. However, a key underlying factor behind these economic and market corrections is a momentous Chinese government drive to integrate China into the global economic system and to liberalize China's financial markets.
There is, also, another impact of this transition which is less well known but more positive for investors – a significant expansion of the global investment universe. MSCI is keeping equity investors on tenterhooks over when it will start to include mainland Chinese shares in its global indices, whilst the major bond index providers are already introducing Chinese onshore (or domestic) government bonds into some of their emerging and global local bond indices. They have been excluded from the main bond benchmarks to date due to capital controls.
To learn more about China's onshore bond market, download the full report above.
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