Chinese Bond Markets – An Introduction
- While foreign investors have flocked to Chinese equities because of performance and correlation considerations, there is relatively less awareness of Chinese bond markets. This paper serves as an introduction to structure, trading venues, investor base and performance of Chinese bond markets for outside investors.
- After more than a quarter century of development, Chinese bond markets have evolved into a RMB 15 trillion (more than USD 2 trillion) market across a broad variety of credit, maturity and investor profiles.
- The market has a multi-layered structure, comprised of the national interbank market, the exchange market and bank counters, with the interbank market being the dominant trading venue.
- Foreign institutional investors can invest in Chinese bonds by seeking regulator approval for QFII quota or access to the interbank market. Product creators and asset managers have hitherto focused on bringing out higher margin equity products. This may change as global investors seek to participate in the growth of Chinese capital markets without volatility of equities.
- Over the five years ending 2008, the Chinese bonds in aggregate returned 8.1% annually in USD terms as measured by S&P/CITIC Composite Bond Index, a rate higher than those of U.S. and European bonds. RMB appreciation was a key return driver.
- Correlations of Chinese bonds with U.S. and European bonds have been less than 10%. Correlation with Chinese equities is a low 1.6%.
- Prospects for future evolution of the market include broadening of corporate bond markets, expansion of derivatives and risk management tools, and possible development of municipal bonds.