Overseas investors are buying bonds from mainland China


In 2017, UBS became the first international wealth manager to establish a presence in the Qianhai Free Trade Zone, with the goal of strengthening financial cooperation between Shenzhen and Hong Kong.

Evelyn Cheng | CNBC

BEIJING – Foreign investors and financial institutions still want to invest in China despite geopolitical tensions – much more foreign money could come into the country, analysts say.

Differences in monetary policy and recovery phases from the coronavirus pandemic have contributed to persistently higher yields on Chinese government bonds compared to those in the US and Europe.

While economists note “unbalanced” recovery from a pandemic, China’s relatively faster growth – and 1.4 million inhabitants – has more investors looking for opportunities.

Interest in mainland China’s bonds has grown, especially from foreign institutional investors, says Jason Pang, portfolio manager of JPMorgan China Bond Opportunities Fund. Launched last year, the fund had $ 124 million worth of client assets under management in late April.

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“The message hasn’t changed. The only change is that interest rates changed abruptly in the first quarter,” he said. Pang expects the foreign share of the Chinese government bond market to reach 15% in the next three to five years.

If that forecast is correct, far more foreign money has been set to enter China.

The foreign market share of mainland China’s bonds – the world’s second-largest after the US – reached 3.44% in April, compared to 3.2% in December, according to Natixis. The company revealed that foreign investors bought a net 58 billion ($ 9 billion) bond in mainland China in April, more than reversed net sales of 9 billion yuan in March.

Looking ahead, Citi expects $ 300 billion to enter the bond market as a result FTSE Russell officially added China to its world government bond index in October.

Greater interest in bonds than in stocks

The interest of foreign institutional investors in entering the market has grown, according to Vicky Tsai, head of the Securities Department for Citi China.

As the securities regulator eased restrictions on the overseas capital investment channel in China in November, demand for the relevant Qualified Foreign Institutional Investor (QFII) license has risen, she said.

“We have assisted many foreign investors in applying for and obtaining QFII licenses, including several top global hedge funds and private fund management companies with significant investments or plans,” Tsai said in an email.

Greater access to the Chinese financial industry

Finance is one of the few industries that Chinese authorities have finally opened to foreigners – amid heightened political tensions with the US

Data released this week from the Rhodium Group shows that U.S. foreign direct investment in China in 2020 fell by about a third from last year, to $ 8.7 billion, the lowest since 2004.

But Wall Street giants are expanding their Chinese business as Beijing has made progress over the past three years in doing so increase foreign investment in the country’s capital market, as well as allow foreign firms greater control over their local business.

On May 12, BlackRock announced that it had received regulatory approval to begin asset management in China through a joint venture with a subsidiary of China Construction Bank and Singapore’s Temasek. BlackRock will own 50.1%, while Temasek will have a 9.9% stake.

Separately, Bloomberg reported this week, citing that source Goldman Sachs employs 320 people in mainland China and Hong Kong. There are plans for another 100 positions later this year, the report said. The investment bank declined to comment when contacted by CNBC.

However, Natixis analysts have noted that business expansion does not necessarily bring significantly more investment flows to China.

One of the long-standing concerns of international investors regarding the land market is their ability to extract capital. The domestic financial industry also has a relatively less developed regulatory structure, while still prone to speculative activities.

“Chinese clients have gone through a mini-boom in the stock market over the past quarter,” Patrick Pei, chief investment strategist at China’s Hywin Wealth Management, said in an email. He said mutual funds, the main way in which onshore clients participate in the market, recorded record levels of fundraising in the first quarter and “sudden waste” in the second.

“Overall, we don’t see a significant shift in interest in Chinese government bonds,” Pei said. “Despite factors such as the rhetoric of U.S. inflationary pressure and Sino-US political dynamics, the difference in rates between China and the U.S. is expected to last, although it is likely to narrow gradually.”

The Yield of the American ten-year treasury held close to 1.63% this week, while its Chinese counterpart fell from 3.19% to 3.15%, Wind Information data show.

Explanation: This story has been updated to reflect that Pang expects the foreign share of the Chinese government bond market to reach 15% in the next three to five years.


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