HONG KONG – China’s policymakers plan to open the doors wider than ever to foreign investment in the country’s US$3 trillion (RM13 trillion) bond market, in part to help shore up the struggling yuan. But the currency is also proving to be a major barrier to the success of their plan.
Foreigners own less than 2% of China’s US$3.3 trillion in outstanding bonds and say getting their cash out of China and recent weakness of the closely controlled currency are obstacles to investment.
Foreign investors are also sceptical they can assess risk accurately when most of the US$2.1 trillion in corporate bonds are rated investment grade by domestic rating agencies.
Chinese bonds offer their highest yields in two years and, on the basis of 10-year sovereign debt, the biggest interest rate gap with equivalent US Treasuries in eight months, highlighting the dilemma of a market that is appealing on the one hand but on the other considered to carry too many risks.
“If investors wanted to have more exposure to Chinese bonds, we can do it tomorrow,” said Andy Seaman, a partner and chief investment officer of London-based fund manager Stratton Street.
“But unfortunately, they don’t. It’s very difficult to persuade people because of the currency. They don’t want renminbi,” he said.
While China’s measures to clamp down on capital outflows to reduce pressure on the yuan have captured the headlines since late last year, the country has also been opening up its bond market and liberalising its financial derivatives, aiming to draw money into the country.
Premier Li Keqiang said in March that China was considering setting up a trading link with Hong Kong this year, similar to one already used to trade stocks, which would give foreign investors much easier access to the world’s third-biggest bond market.