China opens internal bond markets to international investors

China has today approved ‘Bond Connect’, a trading platform through which international investors can access the $US9 trillion Chinese bond market.

While international companies can issue Renminbi (RMB) bonds into the Chinese market (known as Panda bonds), or buy Chinese bonds in offshore markets (Dim Sum bonds), foreign investors are now able for the first time to buy domestic RMB bonds issued by Chinese companies.

Initially the bonds on the ‘Bond Connect’ platform will be an interbank market, with bonds issued by Chinese banks. As the scheme rolls out, overseas investors, including pension funds and sovereign wealth funds, will be able to invest in local government bonds and corporate bond markets, as well as state bonds.

The scheme is enabled by a regulatory agreement between the People’s Bank of China and the Hong Kong Monetary Authority, and it will be executed through a trading platform set up between Hong Kong Exchanges and Clearing and the China Foreign Exchange Trade System & National Interbank Funding Centre, China Central Depository & Clearing and Shanghai Clearing House, reports Reuters.

While foreign inflows of capital will provide a boost for Chinese companies, regulators are likely to continue to stem outflows through capital controls as economic growth slows. Yet the fall of the value of the RMB and decline in growth is unlikely to deter international high yield investors searching for emerging market fixed income exposure.