Talks are underway between China and three key global bond benchmark indices – JP Morgan Global Government Bond Index, Barclays Capital Global Aggregate Bond Index and Citi World Government Bond Index to include onshore bonds after the mainland authorities relaxed rules for foreign participation in the China interbank bond market (CIBM) in May.
Standard Chartered, among the most optimistic, said last week that the inclusion of the onshore bond market onto the global benchmark indices could take place in the coming three to six months.
Currency caution
Other firms had varying opinions. Dinesh Saboo, fixed income and credit research AVP of Aranca, a research and advisory firm believes it will take another year.
“Announcements over the past couple of months, including simplification of access procedures in the onshore bond market for long-term investors, management of RMB according to a basket of global currencies versus the US dollar, and inclusion of the RMB in the IMF’s SDR basket, have mildly alleviated the concerns of global investors and index providers.
“However, we believe the inclusion will take another year or more to complete as policy changes and the systematic opening of the markets need to be more pronounced and followed by relevant executable actions.”
Meanwhile, overseas investors tend to be more cautious after the sudden yuan devaluation last summer, he added. “They would like to observe the changes and interventions in the currency regime over the long-term more closely.”
Also expecting at least one year before inclusion is Sally Wong, CEO of the Hong Kong Investment Funds Association.
“There aren’t many big concerns for the index providers. The most crucial part – the inflow and outflow of capital [to the onshore bond market] – is already open. There are no quota restrictions or limitations on capital remittance and repatriation. It’s already a big step, which exceeds our expectations.
“So now the most important point is to run the process smoothly. It’s more about the technicalities.”
Lingering issues
Hayden Briscoe, head of fixed income at UBS Asset Management APAC said the only obstacle to inclusion on the indices is clarification on currency conversion by the Chinese government. The renminbi is still not freely floated.
“If they do go in [to the indices], and using a rough estimates of a 7% weighting, that would be $3-3.5trn inflow. It’s going to be the single largest change in capital markets in the lifetime.”
Another issue raised by overseas investors is taxes, said Patrick Wong, HSBC securities services’ head of China sales and business development.
“There are two kinds of taxes for fixed income investments in China, the first one being the withholding tax on the coupon payment, the second one is the capital gains tax.
“We are still discussing with the central bank and tax bureau in China and hopefully a guideline can be given and investors can access to the CIBM in a more transparent way.”
He noted 30-plus fund products have been registered to use the CIBM direct, and most of them are bond funds.
Among the applicants of CIBM direct, “the demand mainly comes from asset managers. In the pipeline, about 40% is from the US, another 40% from Europe and the rest from Asia”.
