China takes more steps to open bond market

The mainland’s provident and pension funds should bring up to $610bn into China’s interbank bond market (CIBM) after regulators open it to a wide range of foreign and domestic investors, analysts said.

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The central bank announced more details last Friday about opening China’s interbank bond market to a wide variety of onshore investors.

Domestic insurers, private equity funds, housing provident funds, pension funds, as well as securities investment funds, managers of bank wealth management products and trusts managed by asset management firms will be allowed to submit applications to trade on the CIBM.

However, no start date was provided.

China’s interbank bond market caters to the needs of big institutional investors at the moment, while the exchange-based bond market is for individuals and smaller institutions.

The RMB 7.5trn ($1.15trn) of assets from China’s housing provident funds and pension funds should gradually enter the CIBM in the next few years after the relaxation, bringing at least RMB 3trn of new capital to the market, according to a report by broker Guotai Junan.

Overseas institutional investors who invest for the long-term can trade on the CIBM without quota limits and pre-approval, the PBOC said earlier this year. However, the expectation is that more types of offshore investors will be included.

HSBC GAM, in fact, expects the CIBM to become the investment channel of choice for most overseas investors.

Previously, only managers of wealth management products offered by 16 listed mainland banks could trade on the CIBM, but complicated application procedures deterred participation. Only 331 of those managers opened accounts to trade, according to a report from the China Central Depository & Clearing.

However, as the market is liberalised, the CCDC believes it will gradually attract managers of China’s wealth management products, who collectively hold RMB 23.5trn in assets.

Default concerns

An open CIBM should reduce bond investments through other over-the-counter methods, which are considered less transparent and thus harder for regulators to oversee.

The move may also help deleverage the exchange-based bond market, according to the Guotai Junan report. In a Bloomberg report, Haitong Securities said bond leverage rose to a record 109.4% in February, meaning investors use an average RMB 100 of their own capital for every RMB 109.4 of bonds they purchase. There are also concerns over rising defaults of onshore China bonds.

But more details, such as whether exchange-traded bonds can be repurchased by investors trading on the CIBM, have yet to be clarified by the authorities, the report added.

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